OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. This article supersedes former Uniform Commercial Code (UCC) article 9. As did its predecessor, it provides a comprehensive scheme for the regulation of security interests in personal property and fixtures. For the most part this article follows the general approach and retains much of the terminology of former article 9. In addition to describing many aspects of the operation and interpretation of this article, these comments explain the material changes that this article makes to former article 9. Former article 9 superseded the wide variety of pre-UCC security devices. Unlike the comments to former article 9, however, these comments dwell very little on the pre-UCC state of the law. For that reason, the comments to former article 9 will remain of substantial historical value and interest. They also will remain useful in understanding the background and general conceptual approach of this article.

   Citations to "Bankruptcy Code section ________ " in these comments are to Title 11 of the United States Code as in effect on July 1, 2010.

2. Background and History. In 1990, the Permanent Editorial Board for the UCC with the support of its sponsors, The American Law Institute and the National Conference of Commissioners on Uniform State Laws, established a committee to study article 9 of the UCC. The study committee issued its report as of December 1, 1992, recommending the creation of a drafting committee for the revision of article 9 and also recommending numerous specific changes to article 9. Organized in 1993, a drafting committee met fifteen times from 1993 to 1998. This article was approved by its sponsors in 1998. This Article was conformed to revised Article 1 in 2001 and to amendments to Article 7 in 2003. The sponsors approved amendments to selected sections of this Article in 2010.
3. Reorganization and Renumbering; Captions; Style. This article reflects a substantial reorganization of former article 9 and renumbering of most sections. New part 4 deals with several aspects of third-party rights and duties that are unrelated to perfection and priority. Some of these were covered by part 3 of former article 9. Part 5 deals with filing (covered by former part 4) and part 6 deals with default and enforcement (covered by former part 5). Appendix I contains conforming revisions to other articles of the UCC, and Appendix II contains model provisions for production-money priority.

   This article also includes headings for the subsections as an aid to readers. Unlike section captions, which are part of the UCC, see section 1-107, subsection headings are not a part of the official text itself and have not been approved by the sponsors. Each jurisdiction in which this article is introduced may consider whether to adopt the headings as a part of the statute and whether to adopt a provision clarifying the effect, if any, to be given to the headings. This article also has been conformed to current style conventions.

4. Summary of Revisions. Following is a brief summary of some of the more significant revisions of article 9 that are included in the 1998 revision of this article.
   1. Scope of Article 9. This article expands the scope of article 9 in several respects. Deposit accounts. Section 9-109 includes within this article's scope deposit accounts as original collateral, except in consumer transactions. Former article 9 dealt with deposit accounts only as proceeds of other collateral. Sales of payment intangibles and promissory notes. Section 9-109 also includes within the scope of this article most sales of "payment intangibles" (defined in section 9-102 as general intangibles under which an account debtor's principal obligation is monetary) and "promissory notes" (also defined in section 9-102). Former article 9 included sales of accounts and chattel paper, but not sales of payment intangibles or promissory notes. In its inclusion of sales of payment intangibles and promissory notes, this article continues the drafting convention found in former article 9; it provides that the sale of accounts, chattel paper, payment intangibles, or promissory notes creates a "security interest." The definition of "account" in section 9-102 also has been expanded to include various rights to payment that were general intangibles under former article 9. Health-care-insurance receivables. Section 9-109 narrows article 9's exclusion of transfers of interests in insurance policies by carving out of the exclusion "health-care-insurance receivables" (defined in section 9-102). A health-care-insurance receivable is included within the definition of "account" in section 9-102. Nonpossessory statutory agricultural liens. Section 9-109 also brings nonpossessory statutory agricultural liens within the scope of article 9. Consignments. Section 9-109 provides that "true" consignments - bailments for the purpose of sale by the bailee - are security interests covered by article 9, with certain exceptions. See section 9-102 (defining "consignment"). Currently, many consignments are subject to article 9's filing requirements by operation of former section 2-326. Supporting obligations and property securing rights to payment. This article also addresses explicitly (i) obligations, such as guaranties and letters of credit, that support payment or performance of collateral such as accounts, chattel paper, and payment intangibles, and (ii) any property (including real property) that secures a right to payment or performance that is subject to an article 9 security interest. See sections 9-203, 9-308. Commercial tort claims. Section 9-109 expands the scope of article 9 to include the assignment of commercial tort claims by narrowing the exclusion of tort claims generally. However, this article continues to exclude tort claims for bodily injury and other nonbusiness tort claims of a natural person. See section 9-102 (defining "commercial tort claim"). Transfers by states and governmental units of states. Section 9-109 narrows the exclusion of transfers by states and their governmental units. It excludes only transfers covered by another statute (other than a statute generally applicable to security interests) to the extent the statute governs the creation, perfection, priority, or enforcement of security interests.

      Nonassignable general intangibles, promissory notes, health-care-insurance receivables, and letter-of-credit rights. This article enables a security interest to attach to letter-of-credit rights, health-care-insurance receivables, promissory notes, and general intangibles, including contracts, permits, licenses, and franchises, notwithstanding a contractual or statutory prohibition against or limitation on assignment. This article explicitly protects third parties against any adverse effect of the creation or attempted enforcement of the security interest. See sections 9-408 and 9-409.

      Subject to sections 9-408 and 9-409 and two other exceptions (sections 9-406, concerning accounts, chattel paper, and payment intangibles, and 9-407, concerning interests in leased goods), section 9-401 establishes a baseline rule that the inclusion of transactions and collateral within the scope of article 9 has no effect on nonarticle 9 law dealing with the alienability or inalienability of property. For example, if a commercial tort claim is nonassignable under other applicable law, the fact that a security interest in the claim is within the scope of article 9 does not override the other applicable law's effective prohibition of assignment.

   2. Duties of Secured Party. This article provides for expanded duties of secured parties.

      Release of control. Section 9-208 imposes upon a secured party having control of a deposit account, investment property, or a letter-of-credit right the duty to release control when there is no secured obligation and no commitment to give value. Section 9-209 contains analogous provisions when an account debtor has been notified to pay a secured party.

      Information. Section 9-210 expands a secured party's duties to provide the debtor with information concerning collateral and the obligations that it secures.

      Default and enforcement. Part 6 also includes some additional duties of secured parties in connection with default and enforcement. See, e.g., section 9-616 (duty to explain calculation of deficiency or surplus in a consumer-goods transaction).

   3. Choice of Law. The choice of law rules for the law governing perfection, the effect of perfection or nonperfection, and priority are found in part 3, subpart 1 (sections 9-301 through 9-307). See also section 9-316.

      Where to file: Location of debtor. This article changes the choice of law rule governing perfection (i.e., where to file) for most collateral to the law of the jurisdiction where the debtor is located. See section 9-301. Under former article 9, the jurisdiction of the debtor's location governed only perfection and priority of a security interest in accounts, general intangibles, mobile goods, and, for purposes of perfection by filing, chattel paper and investment property.

      Determining debtor's location. As a baseline rule, section 9-307 follows former section 9-103, under which the location of the debtor is the debtor's place of business (or chief executive office, if the debtor has more than one place of business). Section 9-307 contains three major exceptions. First, a "registered organization," such as a corporation or limited liability company, is located in the state under whose law the debtor is organized, e.g., a corporate debtor's state of incorporation. Second, an individual debtor is located at his or her principal residence. Third, there are special rules for determining the location of the United States and registered organizations organized under the law of the United States.

      Location of non-U.S. debtors. If, applying the foregoing rules, a debtor is located in a jurisdiction whose law does not require public notice as a condition of perfection of a nonpossessory security interest, the entity is deemed located in the District of Columbia. See section 9-307. Thus, to the extent that this article applies to non-U.S. debtors, perfection could be accomplished in many cases by a domestic filing.

      Priority. For tangible collateral such as goods and instruments, section 9-301 provides that the law applicable to priority and the effect of perfection or nonperfection will remain the law of the jurisdiction where the collateral is located, as under former section 9-103 (but without the confusing "last event" test). For intangible collateral, such as accounts, the applicable law for priority will be that of the jurisdiction in which the debtor is located.

      Possessory security interests; agricultural liens. Perfection, the effect of perfection or nonperfection, and priority of a possessory security interest or an agricultural lien are governed by the law of the jurisdiction where the collateral subject to the security interest or lien is located. See sections 9-301 and 9-302.

      Goods covered by certificates of title; deposit accounts; letter-of-credit rights; investment property. This article includes several refinements to the treatment of choice of law matters for goods covered by certificates of title. See section 9-303. It also provides special choice of law rules, similar to those for investment property under current articles 8 and 9, for deposit accounts (section 9-304), investment property (section 9-305), and letter-of-credit rights (section 9-306).

      Change in applicable law. Section 9-316 addresses perfection following a change in applicable law.

   4. Perfection. The rules governing perfection of security interests and agricultural liens are found in part 3, subpart 2 (sections 9-308 through 9-316).

      Deposit accounts; letter-of-credit rights. With certain exceptions, this article provides that a security interest in a deposit account or a letter-of-credit right may be perfected only by the secured party's acquiring "control" of the deposit account or letter-of-credit right. See sections 9-312 and 9-314. Under section 9-104, a secured party has "control" of a deposit account when, with the consent of the debtor, the secured party obtains the depositary bank's agreement to act on the secured party's instructions (including when the secured party becomes the account holder) or when the secured party is itself the depositary bank. The control requirements are patterned on section 8-106, which specifies the requirements for control of investment property. Under section 9-107, "control" of a letter-of-credit right occurs when the issuer or nominated person consents to an assignment of proceeds under section 5-114.

      Electronic chattel paper. Section 9-102 includes a new defined term: "Electronic chattel paper." Electronic chattel paper is a record or records consisting of information stored in an electronic medium (i.e., it is not written). Perfection of a security interest in electronic chattel paper may be by control or filing. See sections 9-105 (sui generis definition of control of electronic chattel paper), 9-312 (perfection by filing), and 9-314 (perfection by control).

      Investment property. The perfection requirements for "investment property" (defined in section 9-102), including perfection by control under section 9-106, remain substantially unchanged. However, a new provision in section 9-314 is designed to ensure that a secured party retains control in "repledge" transactions that are typical in the securities markets.

      Instruments, agricultural liens, and commercial tort claims. This article expands the types of collateral in which a security interest may be perfected by filing to include instruments. See section 9-312. Agricultural liens and security interests in commercial tort claims also are perfected by filing, under this article. See sections 9-308 and 9-310.

      Sales of payment intangibles and promissory notes. Although former article 9 covered the outright sale of accounts and chattel paper, sales of most other types of receivables also are financing transactions to which article 9 should apply. Accordingly, section 9-102 expands the definition of "account" to include many types of receivables (including "health-care-insurance receivables," defined in section 9-102) that former article 9 classified as "general intangibles." It thereby subjects to article 9's filing system sales of more types of receivables than did former article 9. Certain sales of payment intangibles - primarily bank loan participation transactions - should not be subject to the article 9 filing rules. These transactions fall in a residual category of collateral, "payment intangibles" (general intangibles under which the account debtor's principal obligation is monetary), the sale of which is exempt from the filing requirements of article 9. See sections 9-102, 9-109, and 9-309 (perfection upon attachment). The perfection rules for sales of promissory notes are the same as those for sales of payment intangibles.

      Possessory security interests. Several provisions of this article address aspects of security interests involving a secured party or a third party who is in possession of the collateral. In particular, section 9-313 resolves a number of uncertainties under former section 9-305. It provides that a security interest in collateral in the possession of a third party is perfected when the third party acknowledges in an authenticated record that it holds for the secured party's benefit. Section 9-313 also provides that a third party need not so acknowledge and that its acknowledgment does not impose any duties on it, unless it otherwise agrees. A special rule in section 9-313 provides that if a secured party already is in possession of collateral, its security interest remains perfected by possession if it delivers the collateral to a third party and the collateral is accompanied by instructions to hold it for the secured party or to redeliver it to the secured party. Section 9-313 also clarifies the limited circumstances under which a security interest in goods covered by a certificate of title may be perfected by the secured party's taking possession.

      Automatic perfection. Section 9-309 lists various types of security interests as to which no public-notice step is required for perfection (e.g., purchase-money security interests in consumer goods other than automobiles). This automatic perfection also extends to a transfer of a health-care-insurance receivable TO a health-care provider. Those transfers normally will be made by natural persons who receive health-care services; there is little value in requiring filing for perfection in that context. Automatic perfection also applies to security interests created by sales of payment intangibles and promissory notes. Section 9-308 provides that a perfected security interest in collateral supported by a "supporting obligation" (such as an account supported by a guaranty) also is a perfected security interest in the supporting obligation, and that a perfected security interest in an obligation secured by a security interest or lien on property (e.g., a real property mortgage) also is a perfected security interest in the security interest or lien.

   5. Priority; Special Rules for Banks and Deposit Accounts. The rules governing priority of security interests and agricultural liens are found in part 3, subpart 3 (sections 9-317 through 9-339). This article includes several new priority rules and some special rules relating to banks and deposit accounts found in part 3, subpart 4 (sections 9-340 through 9-342).

      Purchase-money security interests: General; consumer-goods transactions; inventory. Section 9-103 substantially rewrites the definition of purchase-money security interest (PMSI) (although the term is not formally "defined"). The substantive changes, however, apply only to nonconsumer goods transactions. (Consumer transactions and consumer goods transactions are discussed below in comment 4(j)). For nonconsumer goods transactions, section 9-103 makes clear that a security interest in collateral may be (to some extent) both a PMSI as well as a non-PMSI, in accord with the "dual status" rule applied by some courts under former article 9 (thereby rejecting the "transformation" rule). The definition provides an even broader conception of a PMSI in inventory, yielding a result that accords with private agreements entered into in response to the uncertainty under former article 9. It also treats consignments as purchase-money security interests in inventory. Section 9-324 revises the PMSI priority rules, but for the most part without material change in substance. Section 9-324 also clarifies the priority rules for competing PMSIs in the same collateral.

      Purchase-money security interests in livestock; agricultural liens. Section 9-324 provides a special PMSI priority, similar to the inventory PMSI priority rule, for livestock. Section 9-322 (which contains the baseline first-to-file-or-perfect priority rule) also recognizes special nonarticle 9 priority rules for agricultural liens, which can override the baseline first-in-time rule.

      Purchase-money security interests in software. Section 9-324 contains a new priority rule for a software purchase-money security interest. (Section 9-102 includes a definition of "software.") Under section 9-103, a software PMSI includes a PMSI in software that is used in goods that are also subject to a PMSI. (Note also that the definition of "chattel paper" has been expanded to include records that evidence a monetary obligation and a security interest in specific goods and software used in the goods.)

      Investment property. The priority rules for investment property are substantially similar to the priority rules found in former section 9-115, which was added in conjunction with the 1994 revisions to UCC article 8. Under section 9-328, if a secured party has control of investment property (sections 8-106 and 9-106), its security interest is senior to a security interest perfected in another manner (e.g., by filing). Also under section 9-328, security interests perfected by control generally rank according to the time that control is obtained or, in the case of a security entitlement or a commodity contract carried in a commodity account, the time when the control arrangement is entered into. This is a change from former section 9-115, under which the security interests ranked equally. However, as between a securities intermediary's security interest in a security entitlement that it maintains for the debtor and a security interest held by another secured party, the securities intermediary's security interest is senior.

      Deposit accounts. This article's priority rules applicable to deposit accounts are found in section 9-327. They are patterned on and are similar to those for investment property in former section 9-115 and section 9-328 of this article. Under section 9-327, if a secured party has control of a deposit account, its security interest is senior to a security interest perfected in another manner (i.e., as cash proceeds). Also under section 9-327, security interests perfected by control rank according to the time that control is obtained, but as between a depositary bank's security interest and one held by another secured party, the depositary bank's security interest is senior. A corresponding rule in section 9-340 makes a depositary bank's right of set-off generally senior to a security interest held by another secured party. However, if the other secured party becomes the depositary bank's customer with respect to the deposit account, then its security interest is senior to the depositary bank's security interest and right of set-off. Sections 9-327 and 9-340.

      Letter-of-credit rights. The priority rules for security interests in letter-of-credit rights are found in section 9-329. They are somewhat analogous to those for deposit accounts. A security interest perfected by control has priority over one perfected in another manner (i.e., as a supporting obligation for the collateral in which a security interest is perfected). Security interests in a letter-of-credit right perfected by control rank according to the time that control is obtained. However, the rights of a transferee beneficiary or a nominated person are independent and superior to the extent provided in section 5-114. See section 9-109(c)(4).

      Chattel paper and instruments. Section 9-330 is the successor to former section 9-308. As under former section 9-308, differing priority rules apply to purchasers of chattel paper who give new value and take possession (or, in the case of electronic chattel paper, obtain control) of the collateral depending on whether a conflicting security interest in the collateral is claimed merely as proceeds. The principal change relates to the role of knowledge and the effect of an indication of a previous assignment of the collateral. Section 9-330 also affords priority to purchasers of instruments who take possession in good faith and without knowledge that the purchase violates the rights of the competing secured party. In addition, to qualify for priority, purchasers of chattel paper, but not of instruments, must purchase in the ordinary course of business.

      Proceeds. Section 9-322 contains new priority rules that clarify when a special priority of a security interest in collateral continues or does not continue with respect to proceeds of the collateral. Other refinements to the priority rules for proceeds are included in sections 9-324 (purchase-money security interest priority) and 9-330 (priority of certain purchasers of chattel paper and instruments).

      Miscellaneous priority provisions. This article also includes: (i) Clarifications of selected good-faith-purchase and similar issues (sections 9-317 and 9-331); (ii) new priority rules to deal with the "double debtor" problem arising when a debtor creates a security interest in collateral acquired by the debtor subject to a security interest created by another person (section 9-325); (iii) new priority rules to deal with the problems created when a change in corporate structure or the like results in a new entity that has become bound by the original debtor's after-acquired property agreement (section 9-326); (iv) a provision enabling most transferees of funds from a deposit account or money to take free of a security interest (section 9-332); (v) substantially rewritten and refined priority rules dealing with accessions and commingled goods (sections 9-335 and 9-336); (vi) revised priority rules for security interests in goods covered by a certificate of title (section 9-337); and (vii) provisions designed to ensure that security interests in deposit accounts will not extend to most transferees of funds on deposit or payees from deposit accounts and will not otherwise "clog" the payments system (sections 9-341 and 9-342).

      Model provisions relating to production-money security interests. Appendix II to this Article contains model definitions and priority rules relating to "production-money security interests" held by secured parties who give new value used in the production of crops. Because no consensus emerged on the wisdom of these provisions during the drafting process, the sponsors make no recommendation on whether these model provisions should be enacted.

   6. Proceeds. Section 9-102 contains an expanded definition of "proceeds" of collateral which includes additional rights and property that arise out of collateral, such as distributions on account of collateral and claims arising out of the loss or nonconformity of, defects in, or damage to collateral. The term also includes collections on account of "supporting obligations," such as guarantees.
   7. Part 4: Additional Provisions Relating to Third-Party Rights. New part 4 contains several provisions relating to the relationships between certain third parties and the parties to secured transactions. It contains new sections 9-401 (replacing former section 9-311) (alienability of debtor's rights), 9-402 (replacing former section 9-317) (secured party not obligated on debtor's contracts), 9-403 (replacing former section 9-206) (agreement not to assert defenses against assignee), 9-404, 9-405, and 9-406 (replacing former section 9-318) (rights acquired by assignee, modification of assigned contract, discharge of account debtor, restrictions on assignment of account, chattel paper, promissory note, or payment intangible ineffective), and 9-407 (replacing some provisions of former section 2A-303) (restrictions on creation or enforcement of security interest in leasehold interest or lessor's residual interest ineffective). It also contains new sections 9-408 (restrictions on assignment of promissory notes, health-care-insurance receivables ineffective, and certain general intangibles ineffective) and 9-409 (restrictions on assignment of letter-of-credit rights ineffective), which are discussed above.
   8. Filing. Part 5 (formerly part 4) of article 9 has been substantially rewritten to simplify the statutory text and to deal with numerous problems of interpretation and implementation that have arisen over the years.

      Medium-neutrality. This article is "medium-neutral"; that is, it makes clear that parties may file and otherwise communicate with a filing office by means of records communicated and stored in media other than on paper.

      Identity of person who files a record; authorization. Part 5 is largely indifferent as to the person who effects a filing. Instead, it addresses whose authorization is necessary for a person to file a record with a filing office. The filing scheme does not contemplate that the identity of a "filer" will be a part of the searchable records. This approach is consistent with, and a necessary aspect of, eliminating signatures or other evidence of authorization from the system (except to the extent that filing offices may choose to employ authentication procedures in connection with electronic communications). As long as the appropriate person authorizes the filing, or, in the case of a termination statement, the debtor is entitled to the termination, it is largely insignificant whether the secured party or another person files any given record.

      Section 9-509 collects in one place most of the rules that determine when a record may be filed. In general, the debtor's authorization is required for the filing of an initial financing statement or an amendment that adds collateral. With one further exception, a secured party of record's authorization is required for the filing of other amendments. The exception arises if a secured party has failed to provide a termination statement that is required because there is no outstanding secured obligation or commitment to give value. In that situation, a debtor is authorized to file a termination statement indicating that it has been filed by the debtor.

      Financing statement formal requisites. The formal requisites for a financing statement are set out in section 9-502. A financing statement must provide the name of the debtor and the secured party and an indication of the collateral that it covers. Sections 9-503 and 9-506 address the sufficiency of a name provided on a financing statement and clarify when a debtor's name is correct and when an incorrect name is insufficient. Section 9-504 addresses the indication of collateral covered. Under section 9-504, a super-generic description (e.g., "all assets" or "all personal property") in a financing statement is a sufficient indication of the collateral. (Note, however, that a super-generic description is inadequate for purposes of a security agreement. See sections 9-108 and 9-203.) To facilitate electronic filing, this article does not require that the debtor's signature or other authorization appear on a financing statement. Instead, it prohibits the filing of unauthorized financing statements and imposes liability upon those who violate the prohibition. See sections 9-509 and 9-626.

      Filing-office operations. Part 5 contains several provisions governing filing operations. First, it prohibits the filing office from rejecting an initial financing statement or other record for a reason other than one of the few that are specified. See sections 9-516 and 9-520. Second, the filing office is obliged to link all subsequent records (e.g., assignments, continuation statements, etc.) to the initial financing statement to which they relate. See section 9-519. Third, the filing office may delete a financing statement and related records from the files no earlier than one year after lapse (lapse normally is five years after the filing date), and then only if a continuation statement has not been filed. See sections 9-515, 9-519, and 9-522. Thus, a financing statement and related records would be discovered by a search of the files even after the filing of a termination statement. This approach helps eliminate filing-office discretion and also eases problems associated with multiple secured parties and multiple partial assignments. Fourth, part 5 mandates performance standards for filing offices. See sections 9-519, 9-520, and 9-523. Fifth, it provides for the promulgation of filing-office rules to deal with details best left out of the statute and requires the filing office to submit periodic reports. See sections 9-526 and 9-527.

      Defaulting or missing secured parties and fraudulent filings. In some areas of the country, serious problems have arisen from fraudulent financing statements that are filed against public officials and other persons. This article addresses the fraud problem by providing the opportunity for a debtor to file a termination statement when a secured party wrongfully refuses or fails to provide a termination statement. See section 9-509. This opportunity also addresses the problem of secured parties that simply disappear through mergers or liquidations. In addition, section 9-518 affords a statutory method by which a debtor who believes that a filed record is inaccurate or was wrongfully filed may indicate that fact in the files, albeit without affecting the efficacy, if any, of the challenged record.

      Extended period of effectiveness for certain financing statements. Section 9-515 contains an exception to the usual rule that financing statements are effective for five years unless a continuation statement is filed to continue the effectiveness for another five years. Under that section, an initial financing statement filed in connection with a "public-finance transaction" or a "manufactured-home transaction" (terms defined in section 9-102) is effective for 30 years.

      National form of financing statement and related forms. Section 9-521 provides for uniform, national written forms of financing statements and related written records that must be accepted by a filing office that accepts written records.

   9. Default and Enforcement. Part 6 of article 9 extensively revises former part 5. Provisions relating to enforcement of consumer-goods transactions and consumer transactions are discussed in comment 4(j).

      Debtor, secondary obligor; waiver. Section 9-602 clarifies the identity of persons who have rights and persons to whom a secured party owes specified duties under part 6. Under that section, the rights and duties are enjoyed by and run to the "debtor," defined in section 9-102 to mean any person with a nonlien property interest in collateral, and to any "obligor." However, with one exception (section 9-616, as it relates to a consumer obligor), the rights and duties concerned affect nondebtor obligors only if they are "secondary obligors." "Secondary obligor" is defined in section 9-102 to include one who is secondarily obligated on the secured obligation, e.g., a guarantor, or one who has a right of recourse against the debtor or another obligor with respect to an obligation secured by collateral. However, under section 9-628, the secured party is relieved from any duty or liability to any person unless the secured party knows that the person is a debtor or obligor. Resolving an issue on which courts disagreed under former article 9, this article generally prohibits waiver by a secondary obligor of its rights and a secured party's duties under part 6. See section 9-602. However, section 9-624 permits a secondary obligor or debtor to waive the right to notification of disposition of collateral and, in a nonconsumer transaction, the right to redeem collateral, if the secondary obligor or debtor agrees to do so after default.

      Rights of collection and enforcement of collateral. Section 9-607 explains in greater detail than former 9-502 the rights of a secured party who seeks to collect or enforce collateral, including accounts, chattel paper, and payment intangibles. It also sets forth the enforcement rights of a depositary bank holding a security interest in a deposit account maintained with the depositary bank. Section 9-607 relates solely to the rights of a secured party vis-a-vis a debtor with respect to collections and enforcement. It does not affect the rights or duties of third parties, such as account debtors on collateral, which are addressed elsewhere (e.g., section 9-406). Section 9-608 clarifies the manner in which proceeds of collection or enforcement are to be applied.

      Disposition of collateral: Warranties of title. Section 9-610 imposes on a secured party who disposes of collateral the warranties of title, quiet possession, and the like that are otherwise applicable under other law. It also provides rules for the exclusion or modification of those warranties.

      Disposition of collateral: Notification, application of proceeds, surplus and deficiency, other effects. Section 9-611 requires a secured party to give notification of a disposition of collateral to other secured parties and lienholders who have filed financing statements against the debtor covering the collateral. (That duty was eliminated by the 1972 revisions to article 9.) However, that section relieves the secured party from that duty when the secured party undertakes a search of the records and a report of the results is unreasonably delayed. Section 9-613, which applies only to nonconsumer transactions, specifies the contents of a sufficient notification of disposition and provides that a notification sent 10 days or more before the earliest time for disposition is sent within a reasonable time. Section 9-615 addresses the application of proceeds of disposition, the entitlement of a debtor to any surplus, and the liability of an obligor for any deficiency. Section 9-619 clarifies the effects of a disposition by a secured party, including the rights of transferees of the collateral.

      Rights and duties of secondary obligor. Section 9-618 provides that a secondary obligor obtains the rights and assumes the duties of a secured party if the secondary obligor receives an assignment of a secured obligation, agrees to assume the secured party's rights and duties upon a transfer to it of collateral, or becomes subrogated to the rights of the secured party with respect to the collateral. The assumption, transfer, or subrogation is not a disposition of collateral under section 9-610, but it does relieve the former secured party of further duties. Former section 9-504(5) did not address whether a secured party was relieved of its duties in this situation.

      Transfer of record or legal title. Section 9-619 contains a new provision making clear that a transfer of record or legal title to a secured party is not of itself a disposition under part 6. This rule applies regardless of the circumstances under which the transfer of title occurs.

      Strict foreclosure. Section 9-620, unlike former section 9-505, permits a secured party to accept collateral in partial satisfaction, as well as full satisfaction, of the obligations secured. This right of strict foreclosure extends to intangible as well as tangible property. Section 9-622 clarifies the effects of an acceptance of collateral on the rights of junior claimants. It rejects the approach taken by some courts - deeming a secured party to have constructively retained collateral in satisfaction of the secured obligations - in the case of a secured party's unreasonable delay in the disposition of collateral. Instead, unreasonable delay is relevant when determining whether a disposition under section 9-610 is commercially reasonable.

      Effect of noncompliance: "Rebuttable presumption" test. Section 9-626 adopts the "rebuttable presumption" test for the failure of a secured party to proceed in accordance with certain provisions of part 6. Under this approach, the deficiency claim of a noncomplying secured party is calculated by crediting the obligor with the greater of the actual net proceeds of a disposition and the amount of net proceeds that would have been realized if the disposition had been conducted in accordance with part 6 (e.g., in a commercially reasonable manner). Section 9-626 rejects the "absolute bar" test that some courts have imposed; that approach bars a noncomplying secured party from recovering any deficiency, regardless of the loss (if any) the debtor suffered as a consequence of the noncompliance.

      "Low-price" dispositions: Calculation of deficiency and surplus. Section 9-615(f) addresses the problem of procedurally regular dispositions that fetch a low price. Subsection (f) provides a special method for calculating a deficiency if the proceeds of a disposition of collateral to a secured party, a person related to the secured party, or a secondary obligor are "significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought." ("Person related to" is defined in section 9-102.) In these situations there is reason to suspect that there may be inadequate incentives to obtain a better price. Consequently, instead of calculating a deficiency (or surplus) based on the actual net proceeds, the deficiency (or surplus) would be calculated based on the proceeds that would have been received in a disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor.

   10. Consumer Goods, Consumer-Goods Transactions, and Consumer Transactions. This article (including the accompanying conforming revisions) includes several special rules for "consumer goods," "consumer transactions," and "consumer-goods transactions." Each term is defined in section 9-102.
       1. Revised sections 2-502 and 2-716 provide a buyer of consumer goods with enhanced rights to possession of the goods, thereby accelerating the opportunity to achieve "buyer in ordinary course of business" status under section 1-201 .
       2. Section 9-103(e) (allocation of payments for determining extent of purchase-money status), (f) (purchase-money status not affected by cross-collateralization, refinancing, restructuring, or the like), and (g) (secured party has burden of establishing extent of purchase-money status) do not apply to consumer-goods transactions. Section 9-103 also provides that the limitation of those provisions to transactions other than consumer-goods transactions leaves to the courts the proper rules for consumer-goods transactions and prohibits the courts from drawing inferences from that limitation.
       3. Section 9-108 provides that in a consumer transaction a description of consumer goods, a security entitlement, securities account, or commodity account "only by (UCC-defined) type of collateral" is not a sufficient collateral description in a security agreement.
       4. Sections 9-403 and 9-404 make effective the Federal Trade Commission's antiholder-in-due-course rule (when applicable), 16 C.F.R. part 433, even in the absence of the required legend.
       5. The 10-day safe-harbor for notification of a disposition provided by section 9-612 does not apply in a consumer transaction.
       6. Section 9-613 (contents and form of notice of disposition) does not apply to a consumer-goods transaction.
       7. Section 9-614 contains special requirements for the contents of a notification of disposition and a safe-harbor, "plain English" form of notification, for consumer-goods transactions.
       8. Section 9-616 requires a secured party in a consumer-goods transaction to provide a debtor with a notification of how it calculated a deficiency at the time it first undertakes to collect a deficiency.
       9. Section 9-620 prohibits partial strict foreclosure with respect to consumer goods collateral and, unless the debtor agrees to waive the requirement in an authenticated record after default, in certain cases requires the secured party to dispose of consumer goods collateral which has been repossessed.
       10. Section 9-626 ("rebuttable presumption" rule) does not apply to a consumer transaction. Section 9-626 also provides that its limitation to transactions other than consumer transactions leaves to the courts the proper rules for consumer transactions and prohibits the courts from drawing inferences from that limitation.
   11. Good Faith. Section 9-102 contains a new definition of "good faith" that includes not only "honesty in fact" but also "the observance of reasonable commercial standards of fair dealing." The definition is similar to the ones adopted in connection with other, recently completed revisions of the UCC.
   12. Transition Provisions. Part 7 (sections 9-701 through 9-707) contains transition provisions. Transition from former article 9 to this article will be particularly challenging in view of its expanded scope, its modification of choice of law rules for perfection and priority, and its expansion of the methods of perfection.
   13. Conforming and Related Amendments to Other UCC Articles. Appendix I contains several proposed revisions to the provisions and Comments of other UCC articles. For the most part the revisions are explained in the Comments to the proposed revisions. Cross-references in other UCC articles to sections of Article 9 also have been revised.

       Articles 2 and 2A. Sections 2-210, 2-326, 2-502, 2-716, 2A-303, and 2A-307 have been revised to address the intersection between articles 2 and 2A and article 9.

Article 1. Revised section 1-201 contains revisions to the definitions of "buyer in ordinary course of business," "purchaser," and "security interest."

Article 5. New section 5-118 is patterned on section 4-210. It provides for a security interest in documents presented under a letter of credit in favor of the issuer and a nominated person on the letter of credit.

Article 8. Revisions to section 8-106, which deals with "control" of securities and security entitlements, conform it to section 8-302, which deals with "delivery." Revisions to section 8-110, which deals with a "securities intermediary's jurisdiction," conform it to the revised treatment of a "commodity intermediary's jurisdiction" in section 9-305. Sections 8-301 and 8-302 have been revised for clarification. Section 8-510 has been revised to conform it to the revised priority rules of section 9-328. Several comments in article 8 also have been revised.

CASE NOTES

Existing accounts as collateral. - The definition of collateral set forth in paragraph (1) (c) of former § 8.9-105 described accounts as property, thus presuming that existing accounts constitute property in existence under the Virginia Uniform Commercial Code. Pine Bldrs., Inc. v. United States, 413 F. Supp. 77 (E.D. Va. 1976).

As right to payment is property. - When rights to payment for services rendered are established, whether conditionally or absolutely, property of an incorporeal nature comes into existence for the purposes of the Virginia Uniform Commercial Code. Pine Bldrs., Inc. v. United States, 413 F. Supp. 77 (E.D. Va. 1976).

Financing statement as security agreement. - A financing statement, in its usual statutory form and disclosing no terms of a security agreement, does not additionally serve as a security agreement. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

The Uniform Commercial Code makes no provision for a naked financing statement to be enforced as a security agreement. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

An instrument is not chattel paper unless it is part of a group of writings which evidence both a monetary obligation and a security interest in or lease of specific goods. Lambert v. Barker, 232 Va. 21 , 348 S.E.2d 214 (1986).

Chattel paper does not include an instrument such as a note establishing a security interest in real property. Lambert v. Barker, 232 Va. 21 , 348 S.E.2d 214 (1986).

"Consignment." - There was no testimony that the debtor told any of his creditors that he was selling other peoples' goods in his store or that creditors knew this. Based on the nature of the debtor's business, the manner in which he held out the goods for sale, and the lack of any overt notice, the court found that creditors did not generally know that the debtor was substantially engaged in the business of selling goods of others. In re Niblett, 441 Bankr. 490, 2009 Bankr. LEXIS 3752 (Bankr. E.D. Va. 2009).

"Consignment" requires more than an occasional sale of other parties' goods. In re Niblett, 441 Bankr. 490, 2009 Bankr. LEXIS 3752 (Bankr. E.D. Va. 2009).

Virginia Code does not require consigned goods to be on the sales floor: they may be held in a storage facility, a warehouse, or elsewhere on the business premises out of sight of the general public; where they are held or how they are displayed is not itself determinative of whether the goods were delivered for sale. It may be evidence of whether the parties intended to merely store the goods or to sell them; it is not necessary that consigned goods be held in public view on the sales floor. In re Niblett, 441 Bankr. 490, 2009 Bankr. LEXIS 3752 (Bankr. E.D. Va. 2009).

Consignments can be formed with restrictions; they do not necessarily vest unfettered discretion in the consignee as to the terms of sale. In many instances, there will be a minimum price agreed by the consignor and consignee; the fact that the debtor sought the permission of the consignors to sell an item or to sell it at a particular price did not change the essential nature of the transaction. In re Niblett, 441 Bankr. 490, 2009 Bankr. LEXIS 3752 (Bankr. E.D. Va. 2009).

"Consumer goods." - In debtor's hands, the painting was inventory; however, the definition of consignment looks to the nature of the goods "immediately before delivery." Additionally: (i) objecting party owned the painting and presumably displayed it in her home, this was a personal use; (ii) there was no indication that she was a dealer in antiques, paintings, or artworks or that she held it for investment or resale; (iii) the fact that she asked her mother to take the painting to debtor did not change the ownership of the painting or the nature of the transaction; and (iv) even though it was intended to be sold on consignment, it did not satisfy the definitional requirements of subsection (20) of § 8.9A-102 because it was a consumer good in her hands immediately before delivery and the court could not conclude from the evidence presented that it was worth $1,000 or more when delivered to debtor for resale. In re Niblett, 441 Bankr. 490, 2009 Bankr. LEXIS 3752 (Bankr. E.D. Va. 2009).

"Debtor." - The context in which the term "debtor" was employed in former § 8.9-504 (3) required that the term be interpreted to include both the owner of the collateral and the obligor, if they were not the same person and included a co-maker or guarantor of the obligation. Rhoten v. United Va. Bank, 221 Va. 222 , 269 S.E.2d 781 (1980).

In a buyer's suit against a seller based on a failed car purchase and financing transaction, where the seller repossessed and sold the car without providing the buyer with notice of the sale, the buyer had an interest in the car as a "debtor" under the UCC, because (1) title in the buyer was not required, (2) the buyer made a down payment on the car, and (3) the buyer assumed an obligation to pay monthly installments for purchase of the car. Barnette v. Brook Rd., Inc., 457 F. Supp. 2d 647, 2006 U.S. Dist. LEXIS 94811 (E.D. Va. 2006).

When a consumer purchased a vehicle from a dealer, but a lender declined to provide financing for the sale, after which the dealer repossessed the vehicle, the consumer was entitled to the remedies in subsection (c) of § 8.9A-625 because: (1) the consumer was a "debtor," under subdivision (a)(28)(A) of § 8.9A-102 ; (2) while the dealer had the right to repossess the vehicle when financing fell through, pursuant to the parties' contract, the dealer had a duty, under §§ 8.9A-611 through 8.9A-614 , to give the consumer notice before disposing of the vehicle, since the parties did not waive this requirement and the consumer retained an interest in the car; and (3) the dealer did not provide notice. Cappo Mgmt. v. V Britt, 282 Va. 33 , 711 S.E.2d 209, 2011 Va. LEXIS 124 (2011).

Debtor by assigning his proceeds from dairy termination program to pay antecedent debt to creditor feed company created an enforceable security interest under subsection (1) of former § 8.9-105 and former § 8.9-201 when debtor signed federal form satisfying sections' requirements. Leake v. Valley Feed Co. (In re Propst), 81 Bankr. 406 (Bankr. W.D. Va. 1988).

Horses are considered "goods." Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

"Instrument." - The test for whether an instrument was within former § 8.9-105(1)(i)'s coverage was whether the item was a type which was ordinarily transferred by delivery with a necessary indorsement or assignment. Panel Publishers, Inc. v. Smith (In re Kelly Group, Inc.), 159 Bankr. 472 (Bankr. W.D. Va. 1993).

A non-negotiable promissory note, even one that by its terms was not assignable, was an instrument for purposes of former § 8.9-105(1)(i). Panel Publishers, Inc. v. Smith (In re Kelly Group, Inc.), 159 Bankr. 472 (Bankr. W.D. Va. 1993).

Negotiable instrument could not also be account or general intangible. - Where a note was a negotiable instrument under § 8.3-104 and, therefore, an instrument under paragraph (1) (i) of former § 8.9-105, it could not also be an account or general intangible subject to the notice requirements of former § 8.9-318 (3). Lambert v. Barker, 232 Va. 21 , 348 S.E.2d 214 (1986).

Entitlement to notice of sale. - Guarantors of note were debtors and thus were entitled to notice of sale of collateral. Woodward v. Resource Bank, 246 Va. 481 , 436 S.E.2d 613 (1993).

The Uniform Commercial Code does not define "accounts receivable," but in the Official Comments "accounts" is defined as the "ordinary commercial account receivable." Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

The use of the term "accounts receivable" is an adequate description of a contract within the context of the Uniform Commercial Code's system of notice filing. Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

Description of collateral as "accounts receivable" includes "accounts." - A security interest in "accounts" was properly perfected by financing statements which described the collateral as "accounts receivable." Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

Even if "accounts receivable" is not synonymous with "accounts," it is sufficiently descriptive, as witnessed by the definition in the Official Comments, its use in other jurisdictions, and the analysis of Uniform Commercial Code commentators, to put third parties on notice that a security interest in a contract may be claimed and that further inquiry is necessary. Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

"Accounts" are ordinary accounts receivable. First Nat'l Exch. Bank v. Kelly, 21 Bankr. 495 (Bankr. W.D. Va. 1982).

"Account" and "general intangible" are mutually exclusive. - This section specifically defines both an "account" and a "general intangible," making each mutually exclusive of the other. Leake v. First Nat'l Bank (In re Shiflett), 40 Bankr. 493 (Bankr. W.D. Va. 1984).

Account arose at time of sale. - Trustee's right to proceeds of sale of collateral of debtor was superior to that of other creditors holding a lien created by reason of a judgment and a related garnishment because an "account" within the meaning of § 8.9A-102(a)(2) came into existence at the moment that debtor accepted third party purchase orders for the collateral, at which time title passed to the third party buyers by operation of § 8.2-401(3)(b), and the trustee's security interest attached thereto by operation of § 8.9A-203 . The resulting right to payment and the funds used as payment were "proceeds" within the meaning of § 8.9A-102 (64) in which the trustee had an interest superior to that of the competing creditors, and § 8.9A-317 did not require a different result given these facts. Swanson v. Applied Process Tech. Int'l, LLC (In re Delta-T Corp.), 475 Bankr. 495, 2012 Bankr. LEXIS 3091 (Bankr. E.D. Va. 2012).

Trademarks are general intangibles within the meaning of U.C.C. Art. 9. In re C.C. & Co., 86 Bankr. 485 (Bankr. E.D. Va. 1988).

"Personal property". - By definition the term "personal property" would include all general intangibles. In re C.C. & Co., 86 Bankr. 485 (Bankr. E.D. Va. 1988).

The collateral term "personal property" includes a trade name and the good will inherent in it. In re C.C. & Co., 86 Bankr. 485 (Bankr. E.D. Va. 1988).

"General intangibles" is residual category of intangible property. - Intangible property includes accounts, contract rights, and a residual category, general intangibles. First Nat'l Exch. Bank v. Kelly, 21 Bankr. 495 (Bankr. W.D. Va. 1982).

Proceeds of settled suit as "general intangibles". - Proceeds of a suit by the debtor, commenced prior to filing of bankruptcy petition and settled by trustee and third-party after the debtor filed for bankruptcy fell within the definition of "general intangibles" as defined in former § 8.9-106 and referred to in security agreement and were subject to security interest, regardless of whether the claim was in tort or contract. Virginia Nat'l Bank v. Phoenix Marine Corp., 20 Bankr. 424 (Bankr. E.D. Va. 1982).

In Virginia, a bank deposit creates the relationship of debtor and creditor between the bank and its depositor. For this reason, the balance of a bank account is a chose in action. Johnston Mem. Hosp. v. Hess, 44 Bankr. 598 (W.D. Va. 1984).

Right to payment is property. - When rights to payment for services rendered are established, whether conditionally or absolutely, property of an incorporeal nature comes into existence for the purposes of the Virginia Uniform Commercial Code. Pine Bldrs., Inc. v. United States, 413 F. Supp. 77 (E.D. Va. 1976).

Funds held by a dairy cooperative in a capital reserve account allocated to debtor, a member of the cooperative, were "general intangibles" rather than an "account," where payment of the capital account was payable conditionally at the instance of the board of directors, it was subject to forfeiture, the amount due was undetermined until the board decided to distribute funds, the capital account was subject to the prior claims of the cooperative's secured and unsecured creditors. Under the definition of "account" there must be a right to payment, which did not exist under the bylaws. Leake v. First Nat'l Bank (In re Shiflett), 40 Bankr. 493 (Bankr. W.D. Va. 1984).

The classes of goods are mutually exclusive. The same property cannot be in two classes at the same time and as to the same person. Thus, an item cannot, for example, be classified as both consumer goods and equipment. Creditway of Am. v. Phillips, 55 Bankr. 663 (Bankr. W.D. Va. 1985).

The test of the classifications of goods under former § 8.9-109 was the owner's use of the goods. Marshall v. Wilton (In re ASW III Builder-Contractor), 12 Bankr. 29 (Bankr. E.D. Va. 1981).

Inventory need not be property of seller. - Nothing in this definition requires that inventory be the property of the individual or business holding it out for sale. Mayhew v. Commonwealth, 20 Va. App. 484, 458 S.E.2d 305 (1995).

Computer items were purchased for use primarily in business rather than for personal, family, or household purposes, where the buyer's uncontradicted testimony was that at the time of purchase she informed salesperson that the computer would be used for buyer's teaching assignments as well as in buyer's variety store, and that she received a special discount as a state instructor for purchase of the items for use in teaching, and where the buyer also indicated that she purchased this computer with its memory capability to handle business transactions, and that she purchased a software package on practical accounting for business billing. Creditway of Am. v. Phillips, 55 Bankr. 663 (Bankr. W.D. Va. 1985).

A pleasure boat which was used by the debtor for recreational purposes could be classified as a consumer good in that as a recreational vehicle, it was "used or bought for use primarily for personal, family, or household purposes." Blue Ridge Recreation, Inc. v. Dean, 55 Bankr. 332 (Bankr. W.D. Va. 1985).

Horses held "equipment" rather than "inventory". - Where in its security agreement warranted that the collateral was "acquired and would be used primarily for business purposes, including but not limited to, the business of breeding, trading, showing or racing horses," and lessee also warranted that it would "not sell, trade, or further hypothecate the collateral without the prior written consent of the lessor," and the lease agreement stated that the "lessee is engaged in the business of breeding, training and showing horses," the horses were not inventory held for sale but should properly have been classified as equipment. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Security agreement is embodiment of parties' intentions and the primary source to which a creditor's or potential creditor's inquiry is directed. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Relevant time to classify collateral for determining requirement and consequences of perfection is the time surrounding the transaction that originally gave rise to the security interest. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Debtor's intended stated use defines goods for purpose of proper place of perfection. - The generally accepted rule is that the debtor's stated intended use, at the time of attachment of the security interest, defines the nature of the goods for purposes of ascertaining the proper place for perfecting the security interest. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Time of transaction as point to determine owner's use of collateral. - Utilizing the time of the transaction that gave rise to the security interest as the point to determine the owner's use of the collateral furthers the policy behind former Article 9. The aim of that policy is to provide a simple, unified structure within which secured financing transactions can be carried out with less cost and more certainty than under pre-U.C.C. law. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Statements in security agreement are not conclusive evidence of owner's intended use of collateral. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Extrinsic evidence surrounding transaction must be used to determine the owner's intended use of the collateral. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Claim governed by the UCC. - Since the landlord had a valid agricultural lien as defined by § 8.9A-102 (5) that was created by § 55-231 in favor of the landlord, and its effectiveness was not dependent on the landlord's possession of the real property in question, the landlord's lien was governed by Virginia's Revised Article 9 of the Uniform Commercial Code. Dean v. Hall,, 2003 U.S. Dist. LEXIS 12720 (E.D. Va. Feb. 25, 2003).

CIRCUIT COURT OPINIONS

"Proceeds." - Debtors' motion to set aside a confession of judgment was granted, where it presented an adequate defense that the meaning of the term "proceeds" in a settlement agreement with the creditor was ambiguous, and did not define what was meant by the same, but the tender of stock as proceeds was just as good as tendering cash to satisfy the obligations under the note. Ali v. TeleScience Int'l, Inc., 64 Va. Cir. 60, 2004 Va. Cir. LEXIS 16 (Fairfax County 2004).

Security interest. - Because a guarantor alleged that the transactions involved in a commercial financial agreement created a security interest, he sufficiently alleged that the implied duty of good faith was applicable. The guarantor alleged that the transactions formed the bargain of the parties in fact, and provided for the bank's interest in personal property in exchange for financing arrangements. Wachovia Bank, N.A. v. Ranson Tyler Chevrolet, L.L.C., 73 Va. Cir. 143, 2007 Va. Cir. LEXIS 43 (Roanoke 2007).

OFFICIAL COMMENT

Comment. - 1. Source. All terms that are defined in article 9 and used in more than one section are consolidated in this section. Note that the definition of "security interest" is found in section 1-201 , not in this article, and has been revised. Many of the definitions in this section are new; many others derive from those in former section 9-105. The following comments also indicate other sections of former article 9 that defined (or explained) terms.

2. Parties to Secured Transactions.

1. "Debtor"; "Obligor"; "Secondary Obligor." Determining whether a person was a "debtor" under former section 9-105(1)(d) required a close examination of the context in which the term was used. To reduce the need for this examination, this article redefines "debtor" and adds new defined terms, "secondary obligor" and "obligor." In the context of part 6 (default and enforcement), these definitions distinguish among three classes of persons: (i) Those persons who may have a stake in the proper enforcement of a security interest by virtue of their nonlien property interest (typically, an ownership interest) in the collateral; (ii) those persons who may have a stake in the proper enforcement of the security interest because of their obligation to pay the secured debt; and (iii) those persons who have an obligation to pay the secured debt but have no stake in the proper enforcement of the security interest. Persons in the first class are debtors. Persons in the second class are secondary obligors if any portion of the obligation is secondary or if the obligor has a right of recourse against the debtor or another obligor with respect to an obligation secured by collateral. One must consult the law of suretyship to determine whether an obligation is secondary. The Restatement (3d), Suretyship and Guaranty section 1 (1996), contains a useful explanation of the concept. Obligors in the third class are neither debtors nor secondary obligors. With one exception (section 9-616, as it relates to a consumer obligor), the rights and duties provided by part 6 affect nondebtor obligors only if they are "secondary obligors."

   By including in the definition of "debtor" all persons with a property interest (other than a security interest in or other lien on collateral), the definition includes transferees of collateral, whether or not the secured party knows of the transfer or the transferee's identity. Exculpatory provisions in part 6 protect the secured party in that circumstance. See sections 9-605 and 9-628. The definition renders unnecessary former section 9-112, which governed situations in which collateral was not owned by the debtor. The definition also includes a "consignee," as defined in this section, as well as a seller of accounts, chattel paper, payment intangibles, or promissory notes.

   Secured parties and other lienholders are excluded from the definition of "debtor" because the interests of those parties normally derive from and encumber a debtor's interest. However, if in a separate secured transaction a secured party grants, as debtor , a security interest in its own interest (i.e., its security interest and any obligation that it secures), the secured party is a debtor in that transaction . This typically occurs when a secured party with a security interest in specific goods assigns chattel paper.

   Consider the following examples:

   Example 1: Behnfeldt borrows money and grants a security interest in her Miata to secure the debt. Behnfeldt is a debtor and an obligor.

   Example 2: Behnfeldt borrows money and grants a security interest in her Miata to secure the debt. Bruno cosigns a negotiable note as maker. As before, Behnfeldt is the debtor and an obligor. As an accommodation party (see section 3-419), Bruno is a secondary obligor. Bruno has this status even if the note states that her obligation is a primary obligation and that she waives all suretyship defenses.

   Example 3: Behnfeldt borrows money on an unsecured basis. Bruno cosigns the note and grants a security interest in her Honda to secure her obligation. Inasmuch as Behnfeldt does not have a property interest in the Honda, Behnfeldt is not a debtor. Having granted the security interest, Bruno is the debtor. Because Behnfeldt is a principal obligor, she is not a secondary obligor. Whatever the outcome of enforcement of the security interest against the Honda or Bruno's secondary obligation, Bruno will look to Behnfeldt for her losses. The enforcement will not affect Behnfeldt's aggregate obligations.

   When the principal obligor (borrower) and the secondary obligor (surety) each has granted a security interest in different collateral, the status of each is determined by the collateral involved.

   Example 4: Behnfeldt borrows money and grants a security interest in her Miata to secure the debt. Bruno cosigns the note and grants a security interest in her Honda to secure her obligation. When the secured party enforces the security interest in Behnfeldt's Miata, Behnfeldt is the debtor, and Bruno is a secondary obligor. When the secured party enforces the security interest in the Honda, Bruno is the "debtor." As in Example 3, Behnfeldt is an obligor, but not a secondary obligor.

2. "Secured Party." The secured party is the person in whose favor the security interest has been created, as determined by reference to the security agreement. This definition controls, among other things, which person has the duties and potential liability that part 6 imposes upon a secured party. The definition of "secured party" also includes a "consignor," a person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold, and the holder of an agricultural lien.

   The definition of "secured party" clarifies the status of various types of representatives. Consider, for example, a multi-bank facility under which Bank A, Bank B, and Bank C are lenders and Bank A serves as the collateral agent. If the security interest is granted to the banks, then they are the secured parties. If the security interest is granted to Bank A as collateral agent, then Bank A is the secured party.

3. Other Parties. A "consumer obligor" is defined as the obligor in a consumer transaction. Definitions of "new debtor" and "original debtor" are used in the special rules found in sections 9-326 and 9-508. 3. Definitions Relating to Creation of a Security Interest. a. "Collateral." As under former section 9-105, "collateral" is the property subject to a security interest and includes accounts and chattel paper that have been sold. It has been expanded in this article. The term now explicitly includes proceeds subject to a security interest. It also reflects the broadened scope of the article. It includes property subject to an agricultural lien as well as payment intangibles and promissory notes that have been sold. b. "Security Agreement." The definition of "security agreement" is substantially the same as under former section 9-105 - an agreement that creates or provides for a security interest. However, the term frequently was used colloquially in former article 9 to refer to the document or writing that contained a debtor's security agreement. This article eliminates that usage, reserving the term for the more precise meaning specified in the definition. Whether an agreement creates a security interest depends not on whether the parties intend that the law characterize the transaction as a security interest but rather on whether the transaction falls within the definition of "security interest" in section 1-201 . Thus, an agreement that the parties characterize as a "lease" of goods may be a "security agreement," notwithstanding the parties' stated intention that the law treat the transaction as a lease and not as a secured transaction. See Section 1-203 . 4. Goods-Related Definitions. a. "Goods"; "Consumer Goods"; "Equipment"; "Farm Products"; "Farming Operation"; "Inventory." The definition of "goods" is substantially the same as the definition in former section 9-105. This article also retains the four mutually-exclusive "types" of collateral that consist of goods: "Consumer goods;" "equipment;" "farm products;" and "inventory." The revisions are primarily for clarification. The classes of goods are mutually exclusive. For example, the same property cannot simultaneously be both equipment and inventory. In borderline cases - a physician's car or a farmer's truck that might be either consumer goods or equipment - the principal use to which the property is put is determinative. Goods can fall into different classes at different times. For example, a radio may be inventory in the hands of a dealer and consumer goods in the hands of a consumer. As under former article 9, goods are "equipment" if they do not fall into another category. The definition of "consumer goods" follows former section 9-109. The classification turns on whether the debtor uses or bought the goods for use "primarily for personal, family, or household purposes." Goods are inventory if they are leased by a lessor or held by a person for sale or lease. The revised definition of "inventory" makes clear that the term includes goods leased by the debtor to others as well as goods held for lease. (The same result should have been obtained under the former definition.) Goods to be furnished or furnished under a service contract, raw materials, and work in process also are inventory. Implicit in the definition is the criterion that the sales or leases are or will be in the ordinary course of business. For example, machinery used in manufacturing is equipment, not inventory, even though it is the policy of the debtor to sell machinery when it becomes obsolete or worn. Inventory also includes goods that are consumed in a business (e.g., fuel used in operations). In general, goods used in a business are equipment if they are fixed assets or have, as identifiable units, a relatively long period of use, but are inventory, even though not held for sale or lease, if they are used up or consumed in a short period of time in producing a product or providing a service. Goods are "farm products" if the debtor is engaged in farming operations with respect to the goods. Animals in a herd of livestock are covered whether the debtor acquires them by purchase or as a result of natural increase. Products of crops or livestock remain farm products as long as they have not been subjected to a manufacturing process. The terms "crops" and "livestock" are not defined. The new definition of "farming operations" is for clarification only. Crops, livestock, and their products cease to be "farm products" when the debtor ceases to be engaged in farming operations with respect to them. If, for example, they come into the possession of a marketing agency for sale or distribution or of a manufacturer or processor as raw materials, they become inventory. Products of crops or livestock, even though they remain in the possession of a person engaged in farming operations, lose their status as farm products if they are subjected to a manufacturing process. What is and what is not a manufacturing operation is not specified in this article. At one end of the spectrum, some processes are so closely connected with farming - such as pasteurizing milk or boiling sap to produce maple syrup or sugar - that they would not constitute manufacturing. On the other hand an extensive canning operation would be manufacturing. Once farm products have been subjected to a manufacturing operation, they normally become inventory.

   The revised definition of "farm products" clarifies the distinction between crops and standing timber and makes clear that aquatic goods produced in aquacultural operations may be either crops or livestock. Although aquatic goods that are vegetable in nature often would be crops and those that are animal would be livestock, this article leaves the courts free to classify the goods on a case-by-case basis. See section 9-324, comment 11.

   The definitions of "goods" and "software" are also mutually exclusive. Computer programs usually constitute "software," and, as such, are not "goods" as this Article uses the terms. However, under the circumstances specified in the definition of "goods," computer programs embedded in goods are part of the "goods" and are not "software."

   b. "Accession"; "Manufactured Home"; "Manufactured-Home Transaction." Other specialized definitions of goods include "accession" (see the special priority and enforcement rules in section 9-335) and "manufactured home" (see section 9-515, permitting a financing statement in a "manufactured-home transaction" to be effective for 30 years). The definition of "manufactured home" borrows from the federal Manufactured Housing Act, 42 U.S.C. section 5401 et seq., and is intended to have the same meaning.

   c. "As-Extracted Collateral." Under this article, oil, gas, and other minerals that have not been extracted from the ground are treated as real property, to which this article does not apply. Upon extraction, minerals become personal property (goods) and eligible to be collateral under this article. See the definition of "goods," which excludes "oil, gas, and other minerals before extraction." To take account of financing practices reflecting the shift from real to personal property, this article contains special rules for perfecting security interests in minerals which attach upon extraction and in accounts resulting from the sale of minerals at the wellhead or minehead. See, e.g., sections 9-301(4) (law governing perfection and priority), 9-501 (place of filing), 9-502 (contents of financing statement), and 9-519 (indexing of records). The new term, "as-extracted collateral," refers to the minerals and related accounts to which the special rules apply. The term "at the wellhead" encompasses arrangements based on a sale of the produce at the moment that it issues from the ground and is measured, without technical distinctions as to whether title passes at the "Christmas tree" of a well, the far side of a gathering tank, or at some other point. The term "at . . . the minehead" is comparable.

   The following examples explain the operation of these provisions.

   Example 5: Debtor owns an interest in oil that is to be extracted. To secure Debtor's obligations to Lender, Debtor enters into an authenticated agreement granting Lender an interest in the oil. Although Lender may acquire an interest in the oil under real property law, Lender does not acquire a security interest under this article until the oil becomes personal property, i.e., until it is extracted and becomes "goods" to which this article applies. Because Debtor had an interest in the oil before extraction and Lender's security interest attached to the oil as extracted, the oil is "as-extracted collateral."

   Example 6: Debtor owns an interest in oil that is to be extracted and contracts to sell the oil to Buyer at the wellhead. In an authenticated agreement, Debtor agrees to sell to Lender the right to payment from Buyer. This right to payment is an account that constitutes "as-extracted collateral." If Lender then resells the account to Financer, Financer acquires a security interest. However, inasmuch as the debtor-seller in that transaction, Lender, had no interest in the oil before extraction, Financer's collateral (the account it owns) is not "as-extracted collateral."

   Example 7: Under the facts of example 6, before extraction, Buyer grants a security interest in the oil to Bank. Although Bank's security interest attaches when the oil is extracted, Bank's security interest is not in "as-extracted collateral," inasmuch as its debtor, Buyer, did not have an interest in the oil before extraction.

   5. Receivables-Related Definitions.

   a. "Account"; "Health-Care-Insurance Receivable"; "As-Extracted Collateral." The definition of "account" has been expanded and reformulated. It is no longer limited to rights to payment relating to goods or services. Many categories of rights to payment that were classified as general intangibles under former article 9 are accounts under this article. Thus, if they are sold, a financing statement must be filed to perfect the buyer's interest in them. As used in the definition of "account," a right to payment "arising out of the use of a credit or charge card or information contained on or for use with the card" is the right of a card issuer to payment from its cardholder. A credit-card or charge-card transaction may give rise to other rights to payments; however, those other rights do not "arise out of the use" of the card or information contained on or for use with the card. Among the types of property that are expressly excluded from the definition of account is "a right to payment for money or funds advanced or sold." As defined in section 1-201 , "money" is limited essentially to currency. As used in the exclusion from the definition of "account," however, "funds" is a broader concept (although the term is not defined). For example, when a bank-lender credits a borrower's deposit account for the amount of a loan, the bank's advance of funds is not a transaction giving rise to an account.

   The definition of "health-care-insurance receivable" is new. It is a subset of the definition of "account." However, the rules generally applicable to account debtors on accounts do not apply to insurers obligated on health-care-insurance receivables. See sections 9-404(e), 9-405(d), and 9-406(i).

   Note that certain accounts also are "as-extracted collateral." See comment 4(c), examples 6 and 7.

   b. "Chattel Paper"; "Electronic Chattel Paper"; "Tangible Chattel Paper." "Chattel paper" consists of a monetary obligation together with a security interest in or a lease of specific goods if the obligation and security interest or lease are evidenced by "a record or records." The definition has been expanded from that found in former article 9 to include records that evidence a monetary obligation and a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, or a lease of specific goods and license of software used in the goods. The expanded definition covers transactions in which the debtor's or lessee's monetary obligation includes amounts owed with respect to software used in the goods. The monetary obligation with respect to the software need not be owed under a license from the secured party or lessor, and the secured party or lessor need not be a party to the license transaction itself. Among the types of monetary obligations that are included in "chattel paper" are amounts that have been advanced by the secured party or lessor to enable the debtor or lessee to acquire or obtain financing for a license of the software used in the goods. The definition also makes clear that rights to payment arising out of credit-card transactions are not chattel paper.

   Charters of vessels are expressly excluded from the definition of chattel paper; they are accounts. The term "charter" as used in this section includes bareboat charters, time charters, successive voyage charters, contracts of affreightment, contracts of carriage, and all other arrangements for the use of vessels.

   Under former section 9-105, only if the evidence of an obligation consisted of "a writing or writings" could an obligation qualify as chattel paper. In this article, traditional, written chattel paper is included in the definition of "tangible chattel paper." "Electronic chattel paper" is chattel paper that is stored in an electronic medium instead of in tangible form. The concept of an electronic medium should be construed liberally to include electrical, digital, magnetic, optical, electromagnetic, or any other current or similar emerging technologies.

   c. "Instrument"; "Promissory Note." The definition of "instrument" includes a negotiable instrument. As under former section 9-105, it also includes any other right to payment of a monetary obligation that is evidenced by a writing of a type that in ordinary course of business is transferred by delivery (and, if necessary, an indorsement or assignment). Except in the case of chattel paper, the fact that an instrument is secured by a security interest or encumbrance on property does not change the character of the instrument as such or convert the combination of the instrument and collateral into a separate classification of personal property. The definition makes clear that rights to payment arising out of credit-card transactions are not instruments. The definition of "promissory note" is new, necessitated by the inclusion of sales of promissory notes within the scope of article 9. It explicitly excludes obligations arising out of "orders" to pay (e.g., checks) as opposed to "promises" to pay. See section 3-104.

4. "General Intangible"; "Payment Intangible." "General intangible" is the residual category of personal property, including things in action, that is not included in the other defined types of collateral. Examples are various categories of intellectual property and the right to payment of a loan of funds that is not evidenced by chattel paper or an instrument. As used in the definition of "general intangible," "things in action" includes rights that arise under a license of intellectual property, including the right to exploit the intellectual property without liability for infringement. The definition has been revised to exclude commercial tort claims, deposit accounts, and letter-of-credit rights. Each of the three is a separate type of collateral. One important consequence of this exclusion is that tortfeasors (commercial tort claims), banks (deposit accounts), and persons obligated on letters of credit (letter-of-credit rights) are not "account debtors" having the rights and obligations set forth in sections 9-404, 9-405, and 9-406. In particular, tortfeasors, banks, and persons obligated on letters of credit are not obligated to pay an assignee (secured party) upon receipt of the notification described in section 9-404(a). See comment 5(h). Another important consequence relates to the adequacy of the description in the security agreement. See section 9-108.

   "Payment intangible" is a subset of the definition of "general intangible." The sale of a payment intangible is subject to this article. See section 9-109(a)(3). Virtually any intangible right could give rise to a right to payment of money once one hypothesizes, for example, that the account debtor is in breach of its obligation. The term "payment intangible," however, embraces only those general intangibles "under which the account debtor's principal obligation is a monetary obligation." (Emphasis added.) A debtor's right to payment from another person of amounts received by the other person on the debtor's behalf, including the right of a merchant in a credit-card, debit-card, prepaid-card, or other payment-card transaction to payment of amounts received by its bank from the card system in settlement of the transaction, is a "payment intangible." (In contrast, the right of a credit-card issuer to payment arising out of the use of a credit card is an "account.")

   In classifying intangible collateral, a court should begin by identifying the particular rights that have been assigned. The account debtor (promisor) under a particular contract may owe several types of monetary obligations as well as other, nonmonetary obligations. If the promisee's right to payment of money is assigned separately, the right is an account or payment intangible, depending on how the account debtor's obligation arose. When all the promisee's rights are assigned together, an account, a payment intangible, and a general intangible all may be involved, depending on the nature of the rights.

   A right to the payment of money is frequently buttressed by ancillary rights, such as rights arising from covenants in a purchase agreement, note, or mortgage requiring insurance on the collateral or forbidding removal of the collateral, rights arising from covenants to preserve the creditworthiness of the promisor, and the lessor's rights with respect to leased goods that arise upon the lessee's default (see Section 2A-523). This article does not treat these ancillary rights separately from the rights to payment to which they relate. For example, attachment and perfection of an assignment of a right to payment of a monetary obligation, whether it be an account or payment intangible, also carries these ancillary rights. Thus, an assignment of the lessor's right to payment under a lease also transfers the lessor's rights with respect to the leased goods under Section 2A-523. If, taken together, the lessor's rights to payment and with respect to the leased goods are evidenced by chattel paper, then, contrary to In re Commercial Money Center, Inc. , 350 B.R. 465 (Bankr. App. 9th Cir. 2006), an assignment of the lessor's right to payment constitutes an assignment of the chattel paper. Although an agreement excluding the lessor's rights with respect to the leased goods from an assignment of the lessor's right to payment may be effective between the parties, the agreement does not affect the characterization of the collateral to the prejudice of creditors of, and purchasers from, the assignor.

   Every "payment intangible" is also a "general intangible." Likewise, "software" is a "general intangible" for purposes of this article. See comment 25. Accordingly, except as otherwise provided, statutory provisions applicable to general intangibles apply to payment intangibles and software.

5. "Letter-of-Credit Right." The term "letter-of-credit right" embraces the rights to payment and performance under a letter of credit (defined in section 5-102). However, it does not include a beneficiary's right to demand payment or performance. Transfer of those rights to a transferee beneficiary is governed by article 5. See sections 9-107, comment 4, and 9-329, comments 3 and 4.
6. "Supporting Obligation." This new term covers the most common types of credit enhancements - suretyship obligations (including guarantees) and letter-of-credit rights that support one of the types of collateral specified in the definition. As explained in comment 2(a), suretyship law determines whether an obligation is "secondary" for purposes of this definition. Section 9-109 generally excludes from this article transfers of interests in insurance policies. However, the regulation of a secondary obligation as an insurance product does not necessarily mean that it is a "policy of insurance" for purposes of the exclusion in section 9-109. Thus, this article may cover a secondary obligation (as a supporting obligation), even if the obligation is issued by a regulated insurance company and the obligation is subject to regulation as an "insurance" product.

   This article contains rules explicitly governing attachment, perfection, and priority of security interests in supporting obligations. See sections 9-203, 9-308, 9-310, and 9-322. These provisions reflect the principle that a supporting obligation is an incident of the collateral it supports.

   Collections of or other distributions under a supporting obligation are "proceeds" of the supported collateral as well as "proceeds" of the supporting obligation itself. See section 9-102 (defining "proceeds") and comment 13(b). As such, the collections and distributions are subject to the priority rules applicable to proceeds generally. See section 9-322. However, under the special rule governing security interests in a letter-of-credit right, a secured party's failure to obtain control (section 9-107) of a letter-of-credit right supporting collateral may leave its security interest exposed to a priming interest of a party who does take control. See section 9-329 (security interest in a letter-of-credit right perfected by control has priority over a conflicting security interest).

7. "Commercial Tort Claim." This term is new. A tort claim may serve as original collateral under this article only if it is a "commercial tort claim." See section 9-109(d). Although security interests in commercial tort claims are within its scope, this article does not override other applicable law restricting the assignability of a tort claim. See section 9-401. A security interest in a tort claim also may exist under this article if the claim is proceeds of other collateral.
8. "Account Debtor." An "account debtor" is a person obligated on an account, chattel paper, or general intangible. The account debtor's obligation often is a monetary obligation; however, this is not always the case. For example, if a franchisee uses its rights under a franchise agreement (a general intangible) as collateral, then the franchisor is an "account debtor." As a general matter, article 3, and not article 9, governs obligations on negotiable instruments. Accordingly, the definition of "account debtor" excludes obligors on negotiable instruments constituting part of chattel paper. The principal effect of this change from the definition in former article 9 is that the rules in sections 9-403, 9-404, 9-405, and 9-406, dealing with the rights of an assignee and duties of an account debtor, do not apply to an assignment of chattel paper in which the obligation to pay is evidenced by a negotiable instrument. (Section 9-406(d), however, does apply to promissory notes, including negotiable promissory notes.) Rather, the assignee's rights are governed by article 3. Similarly, the duties of an obligor on a nonnegotiable instrument are governed by nonarticle 9 law unless the nonnegotiable instrument is a part of chattel paper, in which case the obligor is an account debtor.
9. Receivables Under Government Entitlement Programs. This article does not contain a defined term that encompasses specifically rights to payment or performance under the many and varied government entitlement programs. Depending on the nature of a right under a program, it could be an account, a payment intangible, a general intangible other than a payment intangible, or another type of collateral. The right also might be proceeds of collateral (e.g., crops). 6. Investment-Property-Related Definitions: "Commodity Account"; "Commodity Contract"; "Commodity Customer"; "Commodity Intermediary"; "Investment Property." These definitions are substantially the same as the corresponding definitions in former section 9-115. "Investment property" includes securities, both certificated and uncertificated, securities accounts, security entitlements, commodity accounts, and commodity contracts. The term investment property includes a "securities account" in order to facilitate transactions in which a debtor wishes to create a security interest in all of the investment positions held through a particular account rather than in particular positions carried in the account. Former section 9-115 was added in conjunction with revised article 8 and contained a variety of rules applicable to security interests in investment property. These rules have been relocated to the appropriate sections of article 9. See, e.g., sections 9-203 (attachment), 9-314 (perfection by control), and 9-328 (priority). The terms "security," "security entitlement," and related terms are defined in section 8-102, and the term "securities account" is defined in section 8-501. The terms "commodity account," "commodity contract," "commodity customer," and "commodity intermediary" are defined in this section. Commodity contracts are not "securities" or "financial assets" under article 8. See section 8-103(f). Thus, the relationship between commodity intermediaries and commodity customers is not governed by the indirect-holding-system rules of part 5 of article 8. For securities, article 9 contains rules on security interests, and article 8 contains rules on the rights of transferees, including secured parties, on such matters as the rights of a transferee if the transfer was itself wrongful and gives rise to an adverse claim. For commodity contracts, article 9 establishes rules on security interests, but questions of the sort dealt with in article 8 for securities are left to other law. The indirect-holding-system rules of article 8 are sufficiently flexible to be applied to new developments in the securities and financial markets, where that is appropriate. Accordingly, the definition of "commodity contract" is narrowly drafted to ensure that it does not operate as an obstacle to the application of the article 8 indirect holding system rules to new products. The term "commodity contract" covers those contracts that are traded on or subject to the rules of a designated contract market and foreign commodity contracts that are carried on the books of American commodity intermediaries. The effect of this definition is that the category of commodity contracts that is excluded from article 8 but governed by article 9 is essentially the same as the category of contracts that fall within the exclusive regulatory jurisdiction of the federal Commodity Futures Trading Commission. Commodity contracts are different from securities or other financial assets. A person who enters into a commodity futures contract is not buying an asset having a certain value and holding it in anticipation of increase in value. Rather the person is entering into a contract to buy or sell a commodity at set price for delivery at a future time. That contract may become advantageous or disadvantageous as the price of the commodity fluctuates during the term of the contract. The rules of the commodity exchanges require that the contracts be marked to market on a daily basis; that is, the customer pays or receives any increment attributable to that day's price change. Because commodity customers may incur obligations on their contracts, they are required to provide collateral at the outset, known as "original margin," and may be required to provide additional amounts, known as "variation margin," during the term of the contract. The most likely setting in which a person would want to take a security interest in a commodity contract is where a lender who is advancing funds to finance an inventory of a physical commodity requires the borrower to enter into a commodity contract as a hedge against the risk of decline in the value of the commodity. The lender will want to take a security interest in both the commodity itself and the hedging commodity contract. Typically, such arrangements are structured as security interests in the entire commodity account in which the borrower carries the hedging contracts, rather than in individual contracts. One important effect of including commodity contracts and commodity accounts in article 9 is to provide a clearer legal structure for the analysis of the rights of commodity clearing organizations against their participants and futures commission merchants against their customers. The rules and agreements of commodity clearing organizations generally provide that the clearing organization has the right to liquidate any participant's positions in order to satisfy obligations of the participant to the clearing corporation. Similarly, agreements between futures commission merchants and their customers generally provide that the futures commission merchant has the right to liquidate a customer's positions in order to satisfy obligations of the customer to the futures commission merchant. The main property that a commodity intermediary holds as collateral for the obligations that the commodity customer may incur under its commodity contracts is not other commodity contracts carried by the customer but the other property that the customer has posted as margin. Typically, this property will be securities. The commodity intermediary's security interest in such securities is governed by the rules of this article on security interests in securities, not the rules on security interests in commodity contracts or commodity accounts. Although there are significant analytic and regulatory differences between commodities and securities, the development of commodity contracts on financial products in the past few decades has resulted in a system in which the commodity markets and securities markets are closely linked. The rules on security interests in commodity contracts and commodity accounts provide a structure that may be essential in times of stress in the financial markets. Suppose, for example that a firm has a position in a securities market that is hedged by a position in a commodity market, so that payments that the firm is obligated to make with respect to the securities position will be covered by the receipt of funds from the commodity position. Depending upon the settlement cycles of the different markets, it is possible that the firm could find itself in a position where it is obligated to make the payment with respect to the securities position before it receives the matching funds from the commodity position. If cross-margining arrangements have not been developed between the two markets, the firm may need to borrow funds temporarily to make the earlier payment. The rules on security interests in investment property would facilitate the use of positions in one market as collateral for loans needed to cover obligations in the other market. 7. Consumer-Related Definitions: "Consumer Debtor"; "Consumer Goods"; "Consumer-goods transaction"; "Consumer Obligor"; "Consumer Transaction." The definition of "consumer goods" (discussed above) is substantially the same as the definition in former section 9-109. The definitions of "consumer debtor," "consumer obligor," "consumer-goods transaction," and "consumer transaction" have been added in connection with various new (and old) consumer-related provisions and to designate certain provisions that are inapplicable in consumer transactions. "Consumer-goods transaction" is a subset of "consumer transaction." Under each definition, both the obligation secured and the collateral must have a personal, family, or household purpose. However, "mixed" business and personal transactions also may be characterized as a consumer-goods transaction or consumer transaction. Subparagraph (A) of the definition of consumer-goods transactions and clause (i) of the definition of consumer transaction are primary purposes tests. Under these tests, it is necessary to determine the primary purpose of the obligation or obligations secured. Subparagraph (B) and clause (iii) of these definitions are satisfied if any of the collateral is consumer goods, in the case of a consumer-goods transaction, or "is held or acquired primarily for personal, family, or household purposes," in the case of a consumer transaction. The fact that some of the obligations secured or some of the collateral for the obligation does not satisfy the tests (e.g., some of the collateral is acquired for a business purpose) does not prevent a transaction from being a "consumer transaction" or "consumer-goods transaction." 8. Filing-Related Definitions: "Continuation Statement"; "File Number"; "Filing Office"; "Filing-Office Rule"; "Financing Statement"; "Fixture Filing"; "Manufactured-Home Transaction"; "New Debtor"; "Original Debtor"; "Public-Finance Transaction"; "Termination Statement"; "Transmitting Utility." These definitions are used exclusively or primarily in the filing-related provisions in part 5. Most are self-explanatory and are discussed in the comments to part 5. A financing statement filed in a manufactured-home transaction or a public-finance transaction may remain effective for 30 years instead of the 5 years applicable to other financing statements. See section 9-515(b). The definitions relating to medium neutrality also are significant for the filing provisions. See comment 9. The definition of "transmitting utility" has been revised to embrace the business of transmitting communications generally to take account of new and future types of communications technology. The term designates a special class of debtors for whom separate filing rules are provided in part 5, thereby obviating the many local fixture filings that would be necessary under the rules of section 9-501 for a far-flung public-utility debtor. A transmitting utility will not necessarily be regulated by or operating as such in a jurisdiction where fixtures are located. For example, a utility might own transmission lines in a jurisdiction, although the utility generates no power and has no customers in the jurisdiction. 9. Definitions Relating to Medium Neutrality.

   a. "Record." In many, but not all, instances, the term "record" replaces the term "writing" and "written." A "record" includes information that is in intangible form (e.g., electronically stored) as well as tangible form (e.g., written on paper). Given the rapid development and commercial adoption of modern communication and storage technologies, requirements that documents or communications be "written," "in writing," or otherwise in tangible form do not necessarily reflect or aid commercial practices.

   A "record" need not be permanent or indestructible, but the term does not include any oral or other communication that is not stored or preserved by any means. The information must be stored on paper or in some other medium. Information that has not been retained other than through human memory does not qualify as a record. Examples of current technologies commercially used to communicate or store information include, but are not limited to, magnetic media, optical discs, digital voice messaging systems, electronic mail, audio tapes, and photographic media, as well as paper. "Record" is an inclusive term that includes all of these methods of storing or communicating information. Any "writing" is a record. A record may be authenticated. See comment 9(b). A record may be created without the knowledge or intent of a particular person.

   Like the terms "written" or "in writing," the term "record" does not establish the purposes, permitted uses, or legal effect that a record may have under any particular provision of law. Whatever is filed in the article 9 filing system, including financing statements, continuation statements, and termination statements, whether transmitted in tangible or intangible form, would fall within the definition. However, in some instances, statutes or filing-office rules may require that a paper record be filed. In such cases, even if this article permits the filing of an electronic record, compliance with those statutes or rules is necessary. Similarly, a filer must comply with a statute or rule that requires a particular type of encoding or formatting for an electronic record.

   This article sometimes uses the terms "for record," "of record," "record or legal title," and "record owner." Some of these are terms traditionally used in real property law. The definition of "record" in this article now explicitly excepts these usages from the defined term. Also, this article refers to a record that is filed or recorded in real property recording systems to record a mortgage as a "record of a mortgage." This usage recognizes that the defined term "mortgage" means an interest in real property; it does not mean the record that evidences, or is filed or recorded with respect to, the mortgage.

   b. "Authenticate"; "Communicate"; "Send." The terms "authenticate" and "authenticated" generally replace "sign" and "signed." "Authenticated" replaces and broadens the definition of "signed," in section 1-201 , to encompass authentication of all records, not just writings. (References to authentication of, e.g., an agreement, demand, or notification mean, of course, authentication of a record containing an agreement, demand, or notification.) The terms "communicate" and "send" also contemplate the possibility of communication by nonwritten media. These definitions include the act of transmitting both tangible and intangible records. The definition of "send" replaces, for purposes of this article, the corresponding term in section 1-201 . The reference to "usual means of communication" in that definition contemplates an inquiry into the appropriateness of the method of transmission used in the particular circumstances involved.

   10. Scope-Related Definitions.

   a. Expanded Scope of Article: "Agricultural Lien"; "Consignment"; "Payment Intangible"; "Promissory Note." These new definitions reflect the expanded scope of article 9, as provided in section 9-109(a).

   b. Reduced Scope of Exclusions: "Governmental Unit"; "Health-Care-Insurance Receivable"; "Commercial Tort Claims." These new definitions reflect the reduced scope of the exclusions, provided in section 9-109(c) and (d), of transfers by governmental debtors and assignments of interests in insurance policies and commercial tort claims.

   11. Choice-of-Law-Related Definitions: "Certificate of Title"; "Governmental Unit"; "Jurisdiction of Organization"; "Public Organic Record"; Registered Organization"; "State." These new definitions reflect the changes in the law governing perfection and priority of security interests and agricultural liens provided in part 3, subpart 1.

   Statutes often require applicants for a certificate of title to identify all security interests on the application and require the issuing agency to indicate the identified security interests on the certificate. Some of these statutes provide that priority over the rights of a lien creditor (i.e., perfection of a security interest) in goods covered by the certificate occurs upon indication of the security interest on the certificate; that is, they provide for the indication of the security interest on the certificate as a "condition" of perfection. Other statutes contemplate that perfection is achieved upon the occurrence of another act, e.g., delivery of the application to the issuing agency, that "results" in the indication of the security interest on the certificate. A certificate governed by either type of statute can qualify as a "certificate of title" under this Article. The statute providing for the indication of a security interest need not expressly state the connection between the indication and perfection. For example, a certificate issued pursuant to a statute that requires applicants to identify security interests, requires the issuing agency to indicate the identified security interests on the certificate, but is silent concerning the legal consequences of the indication would be a "certificate of title" if, under a judicial interpretation of the statute, perfection of a security interest is a legal consequence of the indication. Likewise, a certificate would be a "certificate of title" if another statute provides, expressly or as interpreted, the requisite connection between the indication and perfection.

   The first sentence of the definition of "certificate of title" includes certificates consisting of tangible records, of electronic records, and of combinations of tangible and electronic records.

   In many States, a certificate of title covering goods that are encumbered by a security interest is delivered to the secured party by the issuing authority. To eliminate the need for the issuance of a paper certificate under these circumstances, several States have revised their certificate-of-title statutes to permit or require a State agency to maintain an electronic record that evidences ownership of the goods and in which a security interest in the goods may be noted. The second sentence of the definition provides that such a record is a "certificate of title" if it is in fact maintained as an alternative to the issuance of a paper certificate of title, regardless of whether the certificate-of-title statute provides that the record is a certificate of title and even if the statute does not expressly state that the record is maintained instead of issuing a paper certificate.

   Not every organization that may provide information about itself in the public records is a "registered organization." For example, a general partnership is not a "registered organization," even if it files a statement of partnership authority under section 303 of the Uniform Partnership Act (1994) or an assumed name ("dba") certificate. This is because such a partnership is not formed or organized by the filing of a record with, or the issuance of a record by, a State or the United States. In contrast, corporations, limited liability companies, and limited partnerships ordinarily are "registered organizations."

   Not every record concerning a registered organization that is filed with, or issued by, a State or the United States is a "public organic record." For example, a certificate of good standing issued with respect to a corporation or a published index of domestic corporations would not be a "public organic record" because its issuance or publication does not form or organize the corporations named.

   When collateral is held in a trust, one must look to non-UCC law to determine whether the trust is a "registered organization." Non-UCC law typically distinguishes between statutory trusts and common-law trusts. A statutory trust is formed by the filing of a record, commonly referred to as a certificate of trust, in a public office pursuant to a statute. See, e.g., Uniform Statutory Trust Entity Act § 201 (2009); Delaware Statutory Trust Act, Del. Code Ann. tit. 12, § 3801 et seq. A statutory trust is a juridical entity, separate from its trustee and beneficial owners, that may sue and be sued, own property, and transact business in its own name. Inasmuch as a statutory trust is a "legal or commercial entity," it qualifies as a "person other than an individual," and therefore as an "organization," under Section 1-201. A statutory trust that is formed by the filing of a record in a public office is a "registered organization," and the filed record is a "public organic record" of the statutory trust, if the filed record is available to the public for inspection. (The requirement that a record be "available to the public for inspection" is satisfied if a copy of the relevant record is available for public inspection.)

   Unlike a statutory trust, a common-law trust - whether its purpose is donative or commercial - arises from private action without the filing of a record in a public office. See Uniform Trust Code § 401 (2000); Restatement (Third) of Trusts § 10 (2003). Moreover, under sued, own property, and transact business in the name of the trustee acting in the capacity of trustee. A common-law trust that is a "business trust," i.e., that has a business or commercial purpose, is an "organization" under Section 1-201. However, such a trust would not be a "registered organization" if, as is typically the case, the filing of a public record is not needed to form it.

   In some states, however, the trustee of a common-law trust that has a commercial or business purpose is required by statute to file a record in a public office following the trust's formation. See, e.g., Mass. Gen. Laws Ch. 182, § 2; Fla. Stat. Ann. § 609.02. A business trust that is required to file its organic record in a public office is a "registered organization" under the second sentence of the definition if the filed record is available to the public for inspection. Any organic record required to be filed, and filed, with respect to a common-law business trust after the trust is formed is a "public organic record" of the trust. Some statutes require a trust or other organization to file, after formation or organization, a record other than an organic record. See, e.g., N.Y. Gen Assn's Law § 18 (requiring associations doing business within New York to file a certificate designating the secretary of state as an agent upon whom process may be served). This requirement does not render the organization a "registered organization" under the second sentence of the definition, and the record is not a "public organic record."

   12. Deposit-Account-Related Definitions: "Deposit Account"; "Bank." The revised definition of "deposit account" incorporates the definition of "bank," which is new. The definition derives from the definitions of "bank" in sections 4-105(1) and 4A-105(a)(2), which focus on whether the organization is "engaged in the business of banking."

   Deposit accounts evidenced by article 9 "instruments" are excluded from the term "deposit account." In contrast, former section 9-105 excluded from the former definition "an account evidenced by a certificate of deposit." The revised definition clarifies the proper treatment of nonnegotiable or uncertificated certificates of deposit. Under the definition, an uncertificated certificate of deposit would be a deposit account (assuming there is no writing evidencing the bank's obligation to pay) whereas a nonnegotiable certificate of deposit would be a deposit account only if it is not an "instrument" as defined in this section (a question that turns on whether the nonnegotiable certificate of deposit is "of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.")

   A deposit account evidenced by an instrument is subject to the rules applicable to instruments generally. As a consequence, a security interest in such an instrument cannot be perfected by "control" (see section 9-104), and the special priority rules applicable to deposit accounts (see sections 9-327 and 9-340) do not apply.

   The term "deposit account" does not include "investment property," such as securities and security entitlements. Thus, the term also does not include shares in a money-market mutual fund, even if the shares are redeemable by check.

   13. Proceeds-Related Definitions: "Cash Proceeds"; "Noncash Proceeds"; "Proceeds." The revised definition of "proceeds" expands the definition beyond that contained in former section 9-306 and resolves ambiguities in the former section.

   a. Distributions on Account of Collateral. The phrase "whatever is collected on, or distributed on account of, collateral," in subparagraph (B), is broad enough to cover cash or stock dividends distributed on account of securities or other investment property that is original collateral. Compare former section 9-306 ("Any payments or distributions made with respect to investment property collateral are proceeds."). This section rejects the holding of Hastie v. FDIC, 2 F.3d 1042 (10th Cir. 1993) (postpetition cash dividends on stock subject to a prepetition pledge are not "proceeds" under Bankruptcy Code section 552(b)), to the extent the holding relies on the article 9 definition of "proceeds."

   b. Distributions on Account of Supporting Obligations. Under subparagraph (B), collections on and distributions on account of collateral consisting of various credit-support arrangements ("supporting obligations," as defined in section 9-102) also are proceeds. Consequently, they are afforded treatment identical to proceeds collected from or distributed by the obligor on the underlying (supported) right to payment or other collateral. Proceeds of supporting obligations also are proceeds of the underlying rights to payment or other collateral.

   c. Proceeds of Proceeds. The definition of "proceeds" no longer provides that proceeds of proceeds are themselves proceeds. That idea is expressed in the revised definition of "collateral" in section 9-102. No change in meaning is intended.

   d. Proceeds Received by Person Who Did Not Create Security Interest. When collateral is sold subject to a security interest and the buyer then resells the collateral, a question arose under former article 9 concerning whether the "debtor" had "received" what the buyer received on resale and, therefore, whether those receipts were "proceeds" under former section 9-306(2). This article contains no requirement that property be "received" by the debtor for the property to qualify as proceeds. It is necessary only that the property be traceable, directly or indirectly, to the original collateral.

   e. Cash Proceeds and Noncash Proceeds. The definition of "cash proceeds" is substantially the same as the corresponding definition in former section 9-306. The phrase "and the like" covers property that is functionally equivalent to "money, checks, or deposit accounts," such as some money market accounts that are securities or part of securities entitlements. Proceeds other than cash proceeds are noncash proceeds.

   14. Consignment-Related Definitions: "Consignee"; "Consignment"; "Consignor." The definition of "consignment" excludes, in subparagraphs (B) and (C), transactions for which filing would be inappropriate or of insufficient benefit to justify the costs. A consignment excluded from the application of this article by one of those subparagraphs may still be a true consignment; however, it is governed by nonarticle 9 law. The definition also excludes, in subparagraph (D), what have been called "consignments intended for security." These "consignments" are not bailments but secured transactions. Accordingly, all of article 9 applies to them. See Sections 1-201(b)(35), 9-109(a)(1). The "consignor" is the person who delivers goods to the "consignee" in a consignment.

   The definition of "consignment" requires that the goods be delivered "to a merchant for the purpose of sale." If the goods are delivered for another purpose as well, such as milling or processing, the transaction is a consignment nonetheless because a purpose of the delivery is "sale." On the other hand, if a merchant-processor-bailee will not be selling the goods itself but will be delivering to buyers to which the owner-bailor agreed to sell the goods, the transaction would not be a consignment.

   15. "Accounting." This definition describes the record and information that a debtor is entitled to request under section 9-210.

   16. "Document." The definition of "document" incorporates both tangible and electronic documents of title. See section 1-201(b)(16) and Comment 16.

   17. "Encumbrance"; "Mortgage." The definitions of "encumbrance" and "mortgage" are unchanged in substance from the corresponding definitions in former section 9-105. They are used primarily in the special real-property-related priority and other provisions relating to crops, fixtures, and accessions.

   18. "Fixtures." This definition is unchanged in substance from the corresponding definition in former section 9-313. See section 9-334 (priority of security interests in fixtures and crops).

   19. "Good Faith." This Article expands the definition of "good faith" to include "the observance of reasonable commercial standards of fair dealing." The definition in this section applies when the term is used in this Article, and the same concept applies in the context of this Article for purposes of the obligation of good faith imposed by Section 1-203 . See subsection (c).

   20. "Lien Creditor." This definition is unchanged in substance from the corresponding definition in former section 9-301.

   21. "New Value." This article deletes former section 9-108. Its broad formulation of new value, which embraced the taking of after-acquired collateral for a pre-existing claim, was unnecessary, counterintuitive, and ineffective for its original purpose of sheltering after-acquired collateral from attack as a voidable preference in bankruptcy. The new definition derives from Bankruptcy Code section 547(a). The term is used with respect to temporary perfection of security interests in instruments, certificated securities, or negotiable documents under section 9-312(e) and with respect to chattel paper priority in section 9-330.

   22. "Person Related To." Section 9-615 provides a special method for calculating a deficiency or surplus when "the secured party, a person related to the secured party, or a secondary obligor" acquires the collateral at a foreclosure disposition. Separate definitions of the term are provided with respect to an individual secured party and with respect to a secured party that is an organization. The definitions are patterned on the corresponding definition in section 1.301(32) of the Uniform Consumer Credit Code (1974).

   23. "Proposal." This definition describes a record that is sufficient to propose to retain collateral in full or partial satisfaction of a secured obligation. See sections 9-620, 9-621, and 9-622.

   24. "Pursuant to Commitment." This definition is unchanged in substance from the corresponding definition in former section 9-105. It is used in connection with special priority rules applicable to future advances. See section 9-323.

   25. "Software." The definition of "software" is used in connection with the priority rules applicable to purchase-money security interests. See sections 9-103 and 9-324. Software, like a payment intangible, is a type of general intangible for purposes of this article. See Comment 4.a., above, regarding the distinction between "goods" and "software."

   26. Terminology: "Assignment" and "Transfer." In numerous provisions, this article refers to the "assignment" or the "transfer" of property interests. These terms and their derivatives are not defined. This article generally follows common usage by using the terms "assignment" and "assign" to refer to transfers of rights to payment, claims, and liens and other security interests. It generally uses the term "transfer" to refer to other transfers of interests in property. Except when used in connection with a letter-of-credit transaction (see section 9-107, comment 4), no significance should be placed on the use of one term or the other. Depending on the context, each term may refer to the assignment or transfer of an outright ownership interest or to the assignment or transfer of a limited interest, such as a security interest.

CASE NOTES

A purchase money security interest may cover only the price of that which is purchased in the transaction in which the security interest is created. Butterworth Furn. Co. v. Penny, 15 Bankr. 124 (Bankr. E.D. Va. 1981).

And may not cover a pre-existing claim or antecedent debt. Butterworth Furn. Co. v. Penny, 15 Bankr. 124 (Bankr. E.D. Va. 1981).

Negative equity in trade-in vehicle as an "expense." - The obligation to pay the negative equity expense that was paid by the seller is an expense incurred in connection with acquiring rights in the new car, and the debtors' obligation in respect of that expense falls within the meaning of "value given to enable" as used in § 8.9A-103 . GMAC v. Horne, 390 Bankr. 191, 2008 U.S. Dist. LEXIS 51253 (E.D. Va. 2008), aff'd in part and appeal dismissed in part, 2010 U.S. App. LEXIS 18476 (4th Cir. Va. 2010).

Because "negative equity" could be considered as a component of "price" and of the "value given to enable the debtor" under § 8.9A-103(a)(2) , creditor vehicle lenders maintained a purchase money security interest (PMSI) in the negative equity financing. "Hanging paragraph" following 11 U.S.C.S. § 1325(a)(9) applied to the lenders' PMSI claims. GMAC v. Horne, 390 Bankr. 191, 2008 U.S. Dist. LEXIS 51253 (E.D. Va. 2008), aff'd in part and appeal dismissed in part, 2010 U.S. App. LEXIS 18476 (4th Cir. Va. 2010).

Purchase-money collateral. - Parties cannot maintain a purchase-money security interest in extended service contracts because they are not purchase-money collateral, see subdivision (a)(1) of § 8.9A-103 , and, as with extended service contracts, creditors cannot have purchase-money security interests in debtors' insurance policies because they are not purchase-money collateral. Gap insurance is neither mandatory, a component of the loan agreement, nor a value-enhancing add-on, and thus is dissimilar to the examples listed in the Official Comment to the Uniform Commercial Code statute defining a purchase-money security interest. In re Lavigne,, 2007 Bankr. LEXIS 4187 (Bankr. E.D. Va. Nov. 14, 2007)aff'd in part, rev'd in part, GMAC v. Horne, 390 Bankr. 191, 2008 U.S. Dist. LEXIS 51253 (E.D. Va. 2008).

Purchase money security interest not automatically destroyed by refinancing or consolidation. - Former § 8.9-204.1 did not expressly provide that the interest which was protected by compliance with its provisions was necessarily a purchase money security interest as defined in subsection (a) of former § 8.9-107. However, nothing in former § 8.9-204.1 indicated that refinancing a consumer purchase precluded retaining a purchase money security interest and the fact that Virginia enacted the provision as part of Article 9 of the U.C.C. supported a finding that a refinancing or consolidation did not automatically destroy an existing purchase money security interest. In re Leftwich, 174 Bankr. 54 (Bankr. W.D. Va. 1994).

Valid purchase money security interest held. - Where parties did not intend that each transaction they entered into constitute a novation of their prior transactions - it was clear that they intended that creditor retain a security interest in all property purchased to the extent of its purchase price, and because the installment sale and security agreement used by creditor provided a method of allocating payments that complied with the requirements of former § 8.9-204.1, creditor held a valid purchase money security interest in part of the property which the debtor purchased from it. In re Leftwich, 174 Bankr. 54 (Bankr. W.D. Va. 1994).

Extended warranties and service contracts are unrelated, incidental obligations, and like the insurance obligations, they do not fulfill the close nexus requirement. Insurance, extended warranties, and service contracts do not fall within the purchase money security interest, notwithstanding that they are part of the packaged transaction. GMAC v. Horne, 390 Bankr. 191, 2008 U.S. Dist. LEXIS 51253 (E.D. Va. 2008), aff'd in part and appeal dismissed in part, 2010 U.S. App. LEXIS 18476 (4th Cir. Va. 2010).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-107.

2. Scope of This Section. Under section 9-309(1), a purchase-money security interest in consumer goods is perfected when it attaches. Sections 9-317 and 9-324 provide special priority rules for purchase-money security interests in a variety of contexts. This section explains when a security interest enjoys purchase-money status.

3. "Purchase-Money Collateral"; "Purchase-Money Obligation"; "Purchase-Money Security Interest." Subsection (a) defines "purchase-money collateral" and "purchase-money obligation." These terms are essential to the description of what constitutes a purchase-money security interest under subsection (b). As used in subsection (a)(2), the definition of "purchase-money obligation," the "price" of collateral or the "value given to enable" includes obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, administrative charges, expenses of collection and enforcement, attorney's fees, and other similar obligations.

The concept of "purchase-money security interest" requires a close nexus between the acquisition of collateral and the secured obligation. Thus, a security interest does not qualify as a purchase-money security interest if a debtor acquires property on unsecured credit and subsequently creates the security interest to secure the purchase price.

4. Cross-Collateralization of Purchase-Money Security Interests in Inventory. Subsection (b)(2) deals with the problem of cross-collateralized purchase-money security interests in inventory. Consider a simple example:

Example: Seller (S) sells an item of inventory (Item-1) to Debtor (D), retaining a security interest in Item-1 to secure Item-1's price and all other obligations, existing and future, of D to S. S then sells another item of inventory to D (Item-2), again retaining a security interest in Item-2 to secure Item-2's price as well as all other obligations of D to S. D then pays to S Item-1's price. D then sells Item-2 to a buyer in ordinary course of business, who takes Item-2 free of S's security interest.

Under subsection (b)(2), S's security interest in Item-1 securing Item-2's unpaid price would be a purchase-money security interest. This is so because S has a purchase-money security interest in Item-1, Item-1 secures the price of (a "purchase-money obligation incurred with respect to") Item-2 ("other inventory"), and Item-2 itself was subject to a purchase-money security interest. Note that, to the extent Item-1 secures the price of Item-2, S's security interest in Item-1 would not be a purchase-money security interest under subsection (b)(1). The security interest in Item-1 is a purchase-money security interest under subsection (b)(1) only to the extent that Item-1 is "purchase-money collateral," i.e., only to the extent that Item-1 "secures a purchase-money obligation incurred with respect to that collateral" (i.e., Item-1). See subsection (a)(1).

5. Purchase-Money Security Interests in Goods and Software. Subsections (b) and (c) limit purchase-money security interests to security interests in goods, including fixtures, and software. Otherwise, no change in meaning from former section 9-107 is intended. The second sentence of former section 9-115(5)(f) made the purchase-money priority rule (former section 9-312(4)) inapplicable to investment property. This section's limitation makes that provision unnecessary.

Subsection (c) describes the limited circumstances under which a security interest in goods may be accompanied by a purchase-money security interest in software. The software must be acquired by the debtor in a transaction integrated with the transaction in which the debtor acquired the goods, and the debtor must acquire the software for the principal purpose of using the software in the goods. "Software" is defined in section 9-102.

6. Consignments. Under former section 9-114, the priority of the consignor's interest is similar to that of a purchase-money security interest. Subsection (d) achieves this result more directly, by defining the interest of a "consignor," defined in section 9-102, to be a purchase-money security interest in inventory for purposes of this article. This drafting convention obviates any need to set forth special priority rules applicable to the interest of a consignor. Rather, the priority of the consignor's interest as against the rights of lien creditors of the consignee, competing secured parties, and purchasers of the goods from the consignee can be determined by reference to the priority rules generally applicable to inventory, such as sections 9-317, 9-320, 9-322, and 9-324. For other purposes, including the rights and duties of the consignor and consignee as between themselves, the consignor would remain the owner of goods under a bailment arrangement with the consignee. See Section 9-319.

7. Provisions Applicable Only to Non-Consumer-Goods Transactions.

1. "Dual-Status" Rule. For transactions other than consumer-goods transactions, this article approves what some cases have called the "dual-status" rule, under which a security interest may be a purchase-money security interest to some extent and a nonpurchase-money security interest to some extent. (Concerning consumer-goods transactions, see subsection (h) and comment 8.) Some courts have found this rule to be explicit or implicit in the words "to the extent," found in former section 9-107 and continued in subsections (b)(1) and (b)(2). The rule is made explicit in subsection (e). For nonconsumer-goods transactions, this article rejects the "transformation" rule adopted by some cases, under which any cross-collateralization, refinancing, or the like destroys the purchase-money status entirely.

   Consider, for example, what happens when a $10,000 loan secured by a purchase-money security interest is refinanced by the original lender, and, as part of the transaction, the debtor borrows an additional $2,000 secured by the collateral. Subsection (f) resolves any doubt that the security interest remains a purchase-money security interest. Under subsection (b), however, it enjoys purchase-money status only to the extent of $10,000.

2. Allocation of Payments. Continuing with the example, if the debtor makes a $1,000 payment on the $12,000 obligation, then one must determine the extent to which the security interest remains a purchase-money security interest $9,000 or $10,000. Subsection (e)(1) expresses the overriding principle, applicable in cases other than consumer-goods transactions, for determining the extent to which a security interest is a purchase-money security interest under these circumstances: Freedom of contract, as limited by principle of reasonableness. An unconscionable method of application, for example, is not a reasonable one and so would not be given effect under subsection (e)(1). In the absence of agreement, subsection (e)(2) permits the obligor to determine how payments should be allocated. If the obligor fails to manifest its intention, obligations that are not secured will be paid first. (As used in this article, the concept of "obligations that are not secured" means obligations for which the debtor has not created a security interest. This concept is different from and should not be confused with the concept of an "unsecured claim" as it appears in Bankruptcy Code section 506(a).) The obligor may prefer this approach, because unsecured debt is likely to carry a higher interest rate than secured debt. A creditor who would prefer to be secured rather than unsecured also would prefer this approach.

   After the unsecured debt is paid, payments are to be applied first toward the obligations secured by purchase-money security interests. In the event that there is more than one such obligation, payments first received are to be applied to obligations first incurred. See subsection (e)(3). Once these obligations are paid, there are no purchase-money security interests and no additional allocation rules are needed.

   Subsection (f) buttresses the dual-status rule by making it clear that (in a transaction other than a consumer-goods transaction) cross-collateralization and renewals, refinancings, and restructurings do not cause a purchase-money security interest to lose its status as such. The statutory terms "renewed," "refinanced," and "restructured" are not defined. Whether the terms encompass a particular transaction depends upon whether, under the particular facts, the purchase-money character of the security interest fairly can be said to survive. Each term contemplates that an identifiable portion of the purchase-money obligation could be traced to the new obligation resulting from a renewal, refinancing, or restructuring.

3. Burden of Proof. As is the case when the extent of a security interest is in issue, under subsection (g) the secured party claiming a purchase-money security interest in a transaction other than a consumer-goods transaction has the burden of establishing whether the security interest retains its purchase-money status. This is so whether the determination is to be made following a renewal, refinancing, or restructuring or otherwise.

   8. Consumer-Goods Transactions; Characterization Under Other Law. Under subsection (h), the limitation of subsections (e), (f), and (g) to transactions other than consumer-goods transactions leaves to the court the determination of the proper rules in consumer-goods transactions. Subsection (h) also instructs the court not to draw any inference from this limitation as to the proper rules for consumer-goods transactions and leaves the court free to continue to apply established approaches to those transactions.

   This section addresses only whether a security interest is a "purchase-money security interest" under this article, primarily for purposes of perfection and priority. See, e.g., sections 9-317 and 9-324. In particular, its adoption of the dual-status rule, allocation of payments rules, and burden of proof standards for non-consumer-goods transactions is not intended to affect or influence characterizations under other statutes. Whether a security interest is a "purchase-money security interest" under other law is determined by that law. For example, decisions under Bankruptcy Code section 522(f) have applied both the dual-status and the transformation rules. The Bankruptcy Code does not expressly adopt the state law definition of "purchase-money security interest." Where federal law does not defer to this article, this article does not, and could not, determine a question of federal law.

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. New; derived from section 8-106.
2. Why "Control" Matters. This section explains the concept of "control" of a deposit account. "Control" under this section may serve two functions. First, "control . . . pursuant to the debtor's agreement" may substitute for an authenticated security agreement as an element of attachment. See section 9-203(b)(3)(D). Second, when a deposit account is taken as original collateral, the only method of perfection is obtaining control under this section. See section 9-312(b)(1).
3. Requirements for "Control." This section derives from section 8-106 of revised article 8, which defines "control" of securities and certain other investment property. Under subsection (a)(1), the bank with which the deposit account is maintained has control. The effect of this provision is to afford the bank automatic perfection. No other form of public notice is necessary; all actual and potential creditors of the debtor are always on notice that the bank with which the debtor's deposit account is maintained may assert a claim against the deposit account.

   Example: D maintains a deposit account with Bank A. To secure a loan from Banks X, Y, and Z, D creates a security interest in the deposit account in favor of Bank A, as agent for Banks X, Y, and Z. Because Bank A is a "secured party" as defined in Section 9-102, the security interest is perfected by control under subsection (a)(1).

   Under subsection (a)(2), a secured party may obtain control by obtaining the bank's authenticated agreement that it will comply with the secured party's instructions without further consent by the debtor. The analogous provision in section 8-106 does not require that the agreement be authenticated. An agreement to comply with the secured party's instructions suffices for "control" of a deposit account under this section even if the bank's agreement is subject to specified conditions, e.g., that the secured party's instructions are accompanied by a certification that the debtor is in default. (Of course, if the condition is the debtor's further consent, the statute explicitly provides that the agreement would not confer control.) See revised section 8-106, comment 7.

   Under subsection (a)(3), a secured party may obtain control by becoming the bank's "customer," as defined in section 4-104. As the customer, the secured party would enjoy the right (but not necessarily the exclusive right) to withdraw funds from, or close, the deposit account. See sections 4-401(a) and 4-403(a).

   As is the case with possession under Section 9-313, in determining whether a particular person has control under subsection (a), the principles of agency apply. See Section 1-103 and Restatement (3d), Agency § 8.12, Comment b.

   Although the arrangements giving rise to control may themselves prevent, or may enable the secured party at its discretion to prevent, the debtor from reaching the funds on deposit, subsection (b) makes clear that the debtor's ability to reach the funds is not inconsistent with "control."

   Perfection by control is not available for bank accounts evidenced by an instrument (e.g., certain certificates of deposit), which by definition are "instruments" and not "deposit accounts." See section 9-102 (defining "deposit account" and "instrument").

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. "Control" of Electronic Chattel Paper. This article covers security interests in "electronic chattel paper," a new term defined in section 9-102. This section governs how "control" of electronic chattel paper may be obtained. Subsection (a), which derives from Section 16 of the Uniform Electronic Transactions Act, sets forth the general test for control. Subsection (b) sets forth a safe harbor test that, if satisfied, establishes control under the general test in subsection (a).

A secured party's control of electronic chattel paper (i) may substitute for an authenticated security agreement for purposes of attachment under Section 9-203, (ii) is a method of perfection under Section 9-314, and (iii) is a condition for obtaining special, nontemporal priority under Section 9-330. Because electronic chattel paper cannot be transferred, assigned, or possessed in the same manner as tangible chattel paper, a special definition of control is necessary. In descriptive terms, this section provides that control of electronic chattel paper is the functional equivalent of possession of "tangible chattel paper" (a term also defined in Section 9-102).

3. Development of Control Systems. This Article leaves to the marketplace the development of systems and procedures, through a combination of suitable technologies and business practices, for dealing with control of electronic chattel paper in a commercial context. Systems that evolve for control of electronic chattel paper may or may not involve a third party custodian of the relevant records. As under UETA, a system must be shown to reliably establish that the secured party is the assignee of the chattel paper. Reliability is a high standard and encompasses the general principles of uniqueness, identifiability, and unalterability found in subsection (b) without setting forth specific guidelines as to how these principles must be achieved. However, the standards applied to determine whether a party is in control of electronic chattel paper should not be more stringent than the standards now applied to determine whether a party is in possession of tangible chattel paper. For example, just as a secured party does not lose possession of tangible chattel paper merely by virtue of the possibility that a person acting on its behalf could wrongfully redeliver the chattel paper to the debtor, so control of electronic chattel paper would not be defeated by the possibility that the secured party's interest could be subverted by the wrongful conduct of a person (such as a custodian) acting on its behalf.

This section and the concept of control of electronic chattel paper are not based on the same concepts as are control of deposit accounts (Section 9-104), security entitlements, a type of investment property (Section 9-106), and letter-of-credit rights (Section 9-107). The rules for control of those types of collateral are based on existing market practices and legal and regulatory regimes for institutions such as banks and securities intermediaries. Analogous practices for electronic chattel paper are developing nonetheless. The flexible approach adopted by this section, moreover, should not impede the development of these practices and, eventually, legal and regulatory regimes, which may become analogous to those for, e.g., investment property.

4. "Authoritative Copy" of Electronic Chattel Paper. One requirement for establishing control under subsection (b) is that a particular copy be an "authoritative copy." Although other copies may exist, they must be distinguished from the authoritative copy. This may be achieved, for example, through the methods of authentication that are used or by business practices involving the marking of any additional copies. When tangible chattel paper is converted to electronic chattel paper, in order to establish that a copy of the electronic chattel paper is the authoritative copy it may be necessary to show that the tangible chattel paper no longer exists or has been permanently marked to indicate that it is not the authoritative copy.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-115(e).

2. "Control" Under Article 8. For an explanation of "control" of securities and certain other investment property, see section 8-106, comments 4 and 7.

3. "Control" of Commodity Contracts. This section, as did former section 9-115(1)(e), contains provisions relating to control of commodity contracts which are analogous to those in section 8-106 for other types of investment property.

4. Securities Accounts and Commodity Accounts. For drafting convenience, control with respect to a securities account or commodity account is defined in terms of obtaining control over the security entitlements or commodity contracts. Of course, an agreement that provides that (without further consent of the debtor) the securities intermediary or commodity intermediary will honor instructions from the secured party concerning a securities account or commodity account described as such is sufficient. Such an agreement necessarily implies that the intermediary will honor instructions concerning all security entitlements or commodity contracts carried in the account and thus affords the secured party control of all the security entitlements or commodity contracts.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. "Control" of Letter-of-Credit Right. Whether a secured party has control of a letter-of-credit right may determine the secured party's priority as against competing secured parties. See section 9-329. This section provides that a secured party acquires control of a letter-of-credit right by receiving an assignment if the secured party obtains the consent of the issuer or any nominated person, such as a confirmer or negotiating bank, under section 5-114 or other applicable law or practice. Because both issuers and nominated persons may give or be obligated to give value under a letter of credit, this section contemplates that a secured party obtains control of a letter-of-credit right with respect to the issuer or a particular nominated person only to the extent that the issuer or that nominated person consents to the assignment. For example, if a secured party obtains control to the extent of an issuer's obligation but fails to obtain the consent of a nominated person, the secured party does not have control to the extent that the nominated person gives value. In many cases the person or persons who will give value under a letter of credit will be clear from its terms. In other cases, prudence may suggest obtaining consent from more than one person. The details of the consenting issuer's or nominated person's duties to pay or otherwise render performance to the secured party are left to the agreement of the parties.

3. "Proceeds of a Letter of Credit." Section 5-114 follows traditional banking terminology by referring to a letter of credit beneficiary's assignment of its right to receive payment thereunder as an assignment of the "proceeds of a letter of credit." However, as the seller of goods can assign its right to receive payment (an "account") before it has been earned by delivering the goods to the buyer, so the beneficiary of a letter of credit can assign its contingent right to payment before the letter of credit has been honored. See section 5-114(b). If the assignment creates a security interest, the security interest can be perfected at the time it is created. An assignment of, including the creation of a security interest in, a letter-of-credit right is an assignment of a present interest.

4. "Transfer" vs. "Assignment." Letter-of-credit law and practice distinguish the "transfer" of a letter of credit from an "assignment." Under a transfer, the transferee itself becomes the beneficiary and acquires the right to draw. Whether a new, substitute credit is issued or the issuer advises the transferee of its status as such, the transfer constitutes a novation under which the transferee is the new, substituted beneficiary (but only to the extent of the transfer, in the case of a partial transfer).

Section 5-114(e) provides that the rights of a transferee beneficiary or nominated person are independent of the beneficiary's assignment of the proceeds of a letter of credit and are superior to the assignee's right to the proceeds. For this reason, transfer does not appear in this article as a means of control or perfection. Section 9-109(c)(4) recognizes the independent and superior rights of a transferee beneficiary under section 5-114(e); this article does not apply to the rights of a transferee beneficiary or nominated person to the extent that those rights are independent and superior under section 5-114.

5. Supporting Obligation: Automatic Attachment and Perfection. A letter-of-credit right is a type of "supporting obligation," as defined in section 9-102. Under sections 9-203 and 9-308, a security interest in a letter-of-credit right automatically attaches and is automatically perfected if the security interest in the supported obligation is a perfected security interest. However, unless the secured party has control of the letter-of-credit right or itself becomes a transferee beneficiary, it cannot obtain any rights against the issuer or a nominated person under article 5. Consequently, as a practical matter, the secured party's rights would be limited to its ability to locate and identify proceeds distributed by the issuer or nominated person under the letter of credit.

CASE NOTES

The Uniform Commercial Code has rejected "exact and detailed" descriptions in favor of those which reasonably identify what is described. Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

Description of collateral as "accounts receivable" includes "accounts." - A security interest in "accounts" was properly perfected by financing statements which described the collateral as "accounts receivable." Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

Even if "accounts receivable" is not synonymous with "accounts," it is sufficiently descriptive, as witnessed by the definition in the Official Comments, its use in other jurisdictions, and the analysis of Uniform Commercial Code commentators, to put third parties on notice that a security interest in a contract may be claimed and that further inquiry is necessary. Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

Financing statement meets its burden of giving reasonable notice fairly easily. All that is required is that the financing statement be sufficiently descriptive so as reasonably to generate further inquiry. Mahon v. United States/Farmers Home Admin., 82 Bankr. 33 (Bankr. W.D. Va. 1988).

Description giving "notice" is sufficient. - If a description gives "notice" to a third party who upon reasonable inquiry can determine what is, in fact, included as collateral secured thereby it is sufficient. Costner's Furn., Inc. v. Cawthorn, 1 Bankr. 267 (Bankr. W.D. Va. 1979).

And requires a third party to inquire and ascertain what is included in the description. Costner's Furn., Inc. v. Cawthorn, 1 Bankr. 267 (Bankr. W.D. Va. 1979).

As between the parties, financing statement can supplement security agreements by adding collateral. - Nothing in the U.C.C. prohibits parties from contracting to supplement a security agreement with a separate document adding other collateral; thus, as between the parties, the financing statement can supplement the underlying security agreement by adding other collateral. Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

Collateral need not be listed specifically. - The financing statement need not list collateral specifically and is meant only to give notice of a possible security interest in the described collateral. It imposes upon the world a further duty of reasonable inquiry into the existence and content of a security interest in the subject collateral. Mahon v. United States/Farmers Home Admin., 82 Bankr. 33 (Bankr. W.D. Va. 1988).

Financing statement and security agreements furnished sufficient description of collateral. - Where the parties executed security agreements providing that the collateral described therein could be supplemented, i.e., added to, by financing statements signed by the debtors, financing statement, coupled with security agreements, furnished a sufficient description of the collateral under former § 8.9-110, and met the requirements of former § 8.9-203 (1) (a). Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

Notice that plow or tractor covered by lien. - A person reading the words "this financing statement covers farm and other equipment" would be on notice that a tractor or plow was encumbered by a lien. The financing statement simply does not need to describe the collateral; it need only indicate the "type." If one were to choose a general term to collectively describe a tractor, cultivator, plow, disc, corn picker and tobacco setter, the term "farm equipment" would be a logical description. Mahon v. United States/Farmers Home Admin., 82 Bankr. 33 (Bankr. W.D. Va. 1988).

Interest in after-acquired accounts receivable found. - Under Virginia law, security agreement granted movants an interest in after-acquired accounts receivable, as well as those accounts receivable held by debtor when security agreement was executed. Claytor v. Shenandoah Whse. Co., 202 Bankr. 871 (Bankr. W.D. Va. 1996).

Description of collateral insufficient to encompass all of debtor's inventory. - Bankruptcy court did not clearly err in finding that a creditor had a perfected security interest only in the inventory conveyed pursuant to the parties' consignment and security agreement rather than in the entirety of the debtor's inventory; a reasonable title searcher would have likely concluded that the consignment and security agreement was filed to identify the particular consignment agreement and to clarify that the collateral did not include inventory the creditor delivered under any other agreement with the debtor. D.M. Reid Assocs., Ltd. v. Holladay House, Inc. (In re Holladay House, Inc.),, 2008 U.S. Dist. LEXIS 84405 (E.D. Va. Oct. 21, 2008).

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 9-110 and 9-115(3).

2. General Rules. Subsection (a) retains substantially the same formulation as former section 9-110. Subsection (b) expands upon subsection (a) by indicating a variety of ways in which a description might reasonably identify collateral. Whereas a provision similar to subsection (b) was applicable only to investment property under former section 9-115(3), subsection (b) applies to all types of collateral, subject to the limitation in subsection (d). Subsection (b) is subject to subsection (c), which follows prevailing case law and adopts the view that an "all assets" or "all personal property" description for purposes of a security agreement is not sufficient. Note, however, that under section 9-504, a financing statement sufficiently indicates the collateral if it "covers all assets or all personal property."

The purpose of requiring a description of collateral in a security agreement under section 9-203 is evidentiary. The test of sufficiency of a description under this section, as under former section 9-110, is that the description do the job assigned to it: Make possible the identification of the collateral described. This section rejects any requirement that a description is insufficient unless it is exact and detailed (the so-called "serial number" test).

3. After-Acquired Collateral. Much litigation has arisen over whether a description in a security agreement is sufficient to include after-acquired collateral if the agreement does not explicitly so provide. This question is one of contract interpretation and is not susceptible to a statutory rule (other than a rule to the effect that it is a question of contract interpretation). Accordingly, this section contains no reference to descriptions of after-acquired collateral.

4. Investment Property. Under subsection (d), the use of the wrong article 8 terminology does not render a description invalid (e.g., a security agreement intended to cover a debtor's "security entitlements" is sufficient if it refers to the debtor's "securities"). Note also that given the broad definition of "securities account" in section 8-501, a security interest in a securities account also includes all other rights of the debtor against the securities intermediary arising out of the securities account. For example, a security interest in a securities account would include credit balances due to the debtor from the securities intermediary, whether or not they are proceeds of a security entitlement. Moreover, describing collateral as a securities account is a simple way of describing all of the security entitlements carried in the account.

5. Consumer Investment Property; Commercial Tort Claims. Subsection (e) requires greater specificity of description in order to prevent debtors from inadvertently encumbering certain property. Subsection (e) requires that a description by defined "type" of collateral alone of a commercial tort claim or, in a consumer transaction, of a security entitlement, securities account, or commodity account, is not sufficient. For example, "all existing and after-acquired investment property" or "all existing and after-acquired security entitlements," without more, would be insufficient in a consumer transaction to describe a security entitlement, securities account, or commodity account. The reference to " only by type" in subsection (e) means that a description is sufficient if it satisfies subsection (a) and contains a descriptive component beyond the "type" alone. Moreover, if the collateral consists of a securities account or commodity account, a description of the account is sufficient to cover all existing and future security entitlements or commodity contracts carried in the account. See section 9-203(h) and (i).

Under section 9-204, an after-acquired collateral clause in a security agreement will not reach future commercial tort claims. It follows that when an effective security agreement covering a commercial tort claim is entered into the claim already will exist. Subsection (e) does not require a description to be specific. For example, a description such as "all tort claims arising out of the explosion of debtor's factory" would suffice, even if the exact amount of the claim, the theory on which it may be based, and the identity of the tortfeasor(s) are not described. (Indeed, those facts may not be known at the time.)

SubPart 2. Applicability of Title.

CASE NOTES

The scope and policy of this title was stated in former § 8.9-102, and certain multiple state and other transactions were excepted by former §§ 8.9-103 and 8.9-104 from the remaining provisions of former Title 8.9. In re Smith, 311 F. Supp. 900 (W.D. Va. 1970), aff'd sub nom. Callaghan v. Commercial Credit Corp., 437 F.2d 898 (4th Cir. 1971).

Title 9 of the U.C.C. only covers transactions intended to create a security interest in personal property. It abandoned the traditional formal distinctions among security devices and followed the rule of looking beyond form or even wording to the substance of the transaction in determining whether there was this essential intention. Mid-Atlantic Supply, Inc. v. Three Rivers Aluminum Co., 790 F.2d 1121 (4th Cir. 1986).

In a suit challenging the foreclosure of their home mortgage, borrowers failed to state a claim for breach of the implied covenant of good faith and fair dealing because the UCC, pursuant to subdivision (d)(11) of § 8.9A-109 , does not apply to contracts involving the creation or transfer of an interest in real property. Matanic v. Wells Fargo Bank, N.A.,, 2012 U.S. Dist. LEXIS 134154 (E.D. Va. Sept. 18, 2012).

Lack of interest requiring filing of financing statement. - A general contractor which entered into a contract with an electrical contractor for supplies and services in construction of a school building did not have an interest in the electrical supplies stored at the job site whose protection would have required it, under former § 8.9-312 (5), to file a financing statement. Thus, under former § 8.9-102, former Title 8.9 would not be applicable. Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844 , 263 S.E.2d 408 (1980).

Any creation of equity in lessee has been held to be one of the distinctive characteristics of a lease intended for security. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

"Personal property." - By definition, the term "personal property" includes all general intangibles. In re C.C. & Co., 86 Bankr. 485 (Bankr. E.D. Va. 1988).

The collateral term "personal property" includes a trade name and the good will inherent in it. In re C.C. & Co., 86 Bankr. 485 (Bankr. E.D. Va. 1988).

Trademarks are general intangibles within the meaning of U.C.C. Art. 9. In re C.C. & Co., 86 Bankr. 485 (Bankr. E.D. Va. 1988).

Lease held security agreement. - Where under the terms of the lease, the lessor made no express or implied warranties of title, merchantability or fitness for a specific purpose and the lessee waived any such warranties, and, additionally, the lessee was required to maintain upkeep and care of the horses, procure and maintain insurance on the horses at its own expense, assume and bear the entire risk of loss or damage of the horses, pay all taxes and license and regulation fees, and file personal property tax returns and pay all taxes, assessments, fees and penalties which may be assessed on the horses, the lease agreement was actually a security agreement. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Financing of "undocumented vessels". - The Federal Ship Mortgage Act of 1920, 46 U.S.C. §§ 911-984, applies only to larger vessels; so-called "undocumented" vessels are not within the federal statute. Smaller commercial vessels and pleasure vessels are "undocumented." The financing of pleasure craft and yachts, except those of rather large size, is within the Uniform Commercial Code. Blue Ridge Recreation, Inc. v. Dean, 55 Bankr. 332 (Bankr. W.D. Va. 1985).

Proceeds of settled suit subject to security interest. - Proceeds of a suit by the debtor commenced prior to filing of bankruptcy petition and settled by trustee and third-party after the debtor filed for bankruptcy fell within the definition of "general intangibles," as defined in former § 8.9-106 and referred to in security agreement, and were subject to security interest regardless of whether the claim was in tort or contract. Virginia Nat'l Bank v. Phoenix Marine Corp., 20 Bankr. 424 (Bankr. E.D. Va. 1982).

Assignment of life insurance policy benefits. - Article 9 of the Uniform Commercial Code does not govern the state law issues concerning the effect of debtor's purported assignment of life insurance policy benefits. Barnes v. Barnes, 148 Bankr. 818 (Bankr. E.D. Va. 1992).

The collateral term "personal property" includes a trade name and the good will inherent in it. In re C.C. & Co., 86 Bankr. 485 (Bankr. E.D. Va. 1988).

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. Former sections 9-102 and 9-104.
2. Basic Scope Provision. Subsection (a)(1) derives from former section 9-102(1) and (2). These subsections have been combined and shortened. No change in meaning is intended. Under subsection (a)(1), all consensual security interests in personal property and fixtures are covered by this article, except for transactions excluded by subsections (c) and (d). As to which transactions give rise to a "security interest," the definition of that term in section 1-201 must be consulted. When a security interest is created, this article applies regardless of the form of the transaction or the name that parties have given to it. Likewise, the subjective intention of the parties with respect to the legal characterization of their transaction is irrelevant to whether this Article applies, as it was to the application of former Article 9 under the proper interpretation of former Section 9-102.
3. Agricultural Liens. Subsection (a)(2) is new. It expands the scope of this article to cover agricultural liens, as defined in section 9-102.
4. Sales of Accounts, Chattel Paper, Payment Intangibles, Promissory Notes, and Other Receivables. Under subsection (a)(3), as under former section 9-102, this article applies to sales of accounts and chattel paper. This approach generally has been successful in avoiding difficult problems of distinguishing between transactions in which a receivable secures an obligation and those in which the receivable has been sold outright. In many commercial financing transactions the distinction is blurred. Subsection (a)(3) expands the scope of this article by including the sale of a "payment intangible" (defined in section 9-102 as "a general intangible under which the account debtor's principal obligation is a monetary obligation") and a "promissory note" (also defined in section 9-102). To a considerable extent, this article affords these transactions treatment identical to that given sales of accounts and chattel paper. In some respects, however, sales of payment intangibles and promissory notes are treated differently from sales of other receivables. See, e.g., sections 9-309 (automatic perfection upon attachment) and 9-408 (effect of restrictions on assignment). By virtue of the expanded definition of "account" (defined in section 9-102), this article now covers sales of (and other security interests in) "health-care-insurance receivables" (also defined in section 9-102). Although this article occasionally distinguishes between outright sales of receivables and sales that secure an obligation, neither this article nor the definition of "security interest" (section 1-201 (37)) delineates how a particular transaction is to be classified. That issue is left to the courts.
5. Transfer of Ownership in Sales of Receivables. A "sale" of an account, chattel paper, a promissory note, or a payment intangible includes a sale of a right in the receivable, such as a sale of a participation interest. The term also includes the sale of an enforcement right. For example, a "(p)erson entitled to enforce" a negotiable promissory note (section 3-301) may sell its ownership rights in the instrument. See section 3-203, comment 1 ("Ownership rights in instruments may be determined by principles of the law of property, independent of article 3, which do not depend upon whether the instrument was transferred under section 3-203."). Also, the right under section 3-309 to enforce a lost, destroyed, or stolen negotiable promissory note may be sold to a purchaser who could enforce that right by causing the seller to provide the proof required under that section. This article rejects decisions reaching a contrary result, e.g., Dennis Joslin Co. v. Robinson Broadcasting, 977 F.Supp. 491 (D.D.C. 1997). Nothing in this section or any other provision of article 9 prevents the transfer of full and complete ownership of an account, chattel paper, an instrument, or a payment intangible in a transaction of sale. However, as mentioned in comment 4, neither this article nor the definition of "security interest" in section 1-201 provides rules for distinguishing sales transactions from those that create a security interest securing an obligation. This article applies to both types of transactions. The principal effect of this coverage is to apply this article's perfection and priority rules to these sales transactions. Use of terminology such as "security interest," "debtor," and "collateral" is merely a drafting convention adopted to reach this end, and its use has no relevance to distinguishing sales from other transactions. See PEB Commentary No. 14. Following a debtor's outright sale and transfer of ownership of a receivable, the debtor-seller retains no legal or equitable rights in the receivable that has been sold. See section 9-318(a). This is so whether or not the buyer's security interest is perfected. (A security interest arising from the sale of a promissory note or payment intangible is perfected upon attachment without further action. See section 9-309.) However, if the buyer's interest in accounts or chattel paper is unperfected, a subsequent lien creditor, perfected secured party, or qualified buyer can reach the sold receivable and achieve priority over (or take free of) the buyer's unperfected security interest under section 9-317. This is so not because the seller of a receivable retains rights in the property sold; it does not. Nor is this so because the seller of a receivable is a "debtor" and the buyer of a receivable is a "secured party" under this article (they are). It is so for the simple reason that sections 9-317, 9-318(b), and 9-322 make it so, as did former sections 9-301 and 9-312. Because the buyer's security interest is unperfected, for purposes of determining the rights of creditors of and purchasers for value from the debtor-seller, under section 9-318(b) the debtor-seller is deemed to have the rights and title it sold. Section 9-317 subjects the buyer's unperfected interest in accounts and chattel paper to that of the debtor-seller's lien creditor and other persons who qualify under that section.
6. Consignments. Subsection (a)(4) is new. This article applies to every "consignment." The term, defined in section 9-102, includes many but not all "true" consignments (i.e., bailments for the purpose of sale). If a transaction is a "sale or return," as defined in revised section 2-326, it is not a "consignment." In a "sale or return" transaction, the buyer becomes the owner of the goods, and the seller may obtain an enforceable security interest in the goods only by satisfying the requirements of section 9-203. Under common law, creditors of a bailee were unable to reach the interest of the bailor (in the case of a consignment, the consignor-owner). Like former section 2-326 and former article 9, this article changes the common law result; however, it does so in a different manner. For purposes of determining the rights and interests of third-party creditors of, and purchasers of the goods from, the consignee, but not for other purposes, such as remedies of the consignor, the consignee is deemed to acquire under this article whatever rights and title the consignor had or had power to transfer. See section 9-319. The interest of a consignor is defined to be a security interest under revised section 1-201 (37), more specifically, a purchase-money security interest in the consignee's inventory. See section 9-103(d). Thus, the rules pertaining to lien creditors, buyers, and attachment, perfection, and priority of competing security interests apply to consigned goods. The relationship between the consignor and consignee is left to other law. Consignors also have no duties under part 6. See section 9-601(g). Sometimes parties characterize transactions that secure an obligation (other than the bailee's obligation to returned bailed goods) as "consignments." These transactions are not "consignments" as contemplated by section 9-109(a)(4). See section 9-102. This article applies also to these transactions, by virtue of section 9-109(a)(1). They create a security interest within the meaning of the first sentence of section 1-201 (37). This article does not apply to bailments for sale that fall outside the definition of "consignment" in section 9-102 and that do not create a security interest that secures an obligation.
7. Security Interest in Obligation Secured by Nonarticle 9 Transaction. Subsection (b) is unchanged in substance from former section 9-102(3). The following example provides an illustration.

   Example 1: O borrows $10,000 from M and secures its repayment obligation, evidenced by a promissory note, by granting to M a mortgage on O's land. This article does not apply to the creation of the real property mortgage. However, if M sells the promissory note to X or gives a security interest in the note to secure M's own obligation to X, this article applies to the security interest thereby created in favor of X. The security interest in the promissory note is covered by this article even though the note is secured by a real property mortgage. Also, X's security interest in the note gives X an attached security interest in the mortgage lien that secures the note and, if the security interest in the note is perfected, the security interest in the mortgage lien likewise is perfected. See sections 9-203 and 9-308.

   It also follows from subsection (b) that an attempt to obtain or perfect a security interest in a secured obligation by complying with nonarticle 9 law, as by an assignment of record of a real property mortgage, would be ineffective. Finally, it is implicit from subsection (b) that one cannot obtain a security interest in a lien, such as a mortgage on real property, that is not also coupled with an equally effective security interest in the secured obligation. This article rejects cases such as In re Maryville Savings & Loan Corp. , 743 F.2d 413 (6th Cir. 1984), clarified on reconsideration, 760 F.2d 119 (1985).

8. Federal Preemption. Former section 9-104(a) excluded from article 9 "a security interest subject to any statute of the United States, to the extent that such statute governs the rights of parties to and third parties affected by transactions in particular types of property." Some (erroneously) read the former section to suggest that article 9 sometimes deferred to federal law even when federal law did not preempt article 9. Subsection (c)(1) recognizes explicitly that this article defers to federal law only when and to the extent that it must - i.e., when federal law preempts it.
9. Governmental Debtors. Former section 9-104(e) excluded transfers by governmental debtors. It has been revised and replaced by the exclusions in new paragraphs (2) and (3) of subsection (c). These paragraphs reflect the view that article 9 should apply to security interests created by a state, foreign country, or a "governmental unit" (defined in section 9-102) of either except to the extent that another statute governs the issue in question. Under paragraph (2), this article defers to all statutes of the forum state. (A forum cannot determine whether it should consult the choice of law rules in the forum's UCC unless it first determines that its UCC applies to the transaction before it.) Paragraph (3) defers to statutes of another state or a foreign country only to the extent that those statutes contain rules applicable specifically to security interests created by the governmental unit in question.

   Example 2: A New Jersey state commission creates a security interest in favor of a New York bank. The validity of the security interest is litigated in New York. The relevant security agreement provides that it is governed by New York law. To the extent that a New Jersey statute contains rules peculiar to creation of security interests by governmental units generally, to creation of security interests by state commissions, or to creation of security interests by this particular state commission, then that law will govern. On the other hand, to the extent that New Jersey law provides that security interests created by governmental units, state commissions, or this state commission are governed by the law generally applicable to secured transactions (i.e., New Jersey's article 9), then New York's article 9 will govern.

   Example 3: An airline that is an instrumentality of a foreign country creates a security interest in favor of a New York bank. The analysis used in the previous example would apply here. That is, if the matter is litigated in New York, New York law would govern except to the extent that the foreign country enacted a statute applicable to security interests created by governmental units generally or by the airline specifically.

   The fact that New York law applies does not necessarily mean that perfection is accomplished by filing in New York. Rather, it means that the court should apply New York's article 9, including its choice of law provisions. Under New York's section 9-301, perfection is governed by the law of the jurisdiction in which the debtor is located. Section 9-307 determines the debtor's location for choice of law purposes.

   If a transaction does not bear an appropriate relation to the forum state, then that state's article 9 will not apply, regardless of whether the transaction would be excluded by paragraph (3).

   Example 4: A Belgian governmental unit grants a security interest in its equipment to a Swiss secured party. The equipment is located in Belgium. A dispute arises and, for some reason, an action is brought in a New Mexico state court. Inasmuch as the transaction bears no "appropriate relation" to New Mexico, New Mexico's UCC, including its article 9, is inapplicable. See section 1-105(1). New Mexico's section 9-109(c) on excluded transactions should not come into play. Even if the parties agreed that New Mexico law would govern, the parties' agreement would not be effective because the transaction does not bear a "reasonable relation" to New Mexico. See section 1-105(1).

   Conversely, article 9 will come into play only if the litigation arises in a UCC jurisdiction or if a foreign choice of law rule leads a foreign court to apply the law of a UCC jurisdiction. For example, if issues concerning a security interest granted by a foreign airline to a New York bank are litigated overseas, the court may be bound to apply the law of the debtor's jurisdiction and not New York's article 9.

10. Certain Statutory and Common-Law Liens; Interests in Real Property. With few exceptions (nonconsensual agricultural liens being one), this article applies only to consensual security interests in personal property. Following former section 9-104(b) and (j), paragraphs (1) and (11) of subsection (d) exclude landlord's liens and leases and most other interests in or liens on real property. These exclusions generally reiterate the limitations on coverage (i.e., "by contract," "in personal property and fixtures") made explicit in subsection (a)(1). Similarly, most jurisdictions provide special liens to suppliers of many types of services and materials, either by statute or by common law. With the exception of agricultural liens, it is not necessary for this article to provide general codification of this lien structure, which is determined in large part by local conditions and which is far removed from ordinary commercial financing. As under former section 9-104(c), subsection (d)(2) excludes these suppliers' liens (other than agricultural liens) from this article. However, section 9-333 provides a rule for determining priorities between certain possessory suppliers' liens and security interests covered by this article.
11. Wage and Similar Claims. As under former section 9-104(d), subsection (d)(3) excludes assignments of claims for wages and the like from this article. These assignments present important social issues that other law addresses. The Federal Trade Commission has ruled that, with some exceptions, the taking of an assignment of wages or other earnings is an unfair act or practice under the Federal Trade Commission Act. See 16 C.F.R. part 444. State statutes also may regulate such assignments.
12. Certain Sales and Assignments of Receivables; Judgments. In general this article covers security interests in (including sales of) accounts, chattel paper, payment intangibles, and promissory notes. Paragraphs (4), (5), (6), and (7) of subsection (d) exclude from the article certain sales and assignments of receivables that, by their nature, do not concern commercial financing transactions. These paragraphs add to the exclusions in former section 9-104(f) analogous sales and assignments of payment intangibles and promissory notes. For similar reasons, subsection (d)(9) retains the exclusion of assignments of judgments under former section 9-104(h) (other than judgments taken on a right to payment that itself was collateral under this article).
13. Insurance. Subsection (d)(8) narrows somewhat the broad exclusion of interests in insurance policies under former section 9-104(g). This article now covers assignments by or to a health-care provider of "health-care-insurance receivables" (defined in section 9-102).
14. Set-Off. Subsection (d)(10) adds two exceptions to the general exclusion of set-off rights from article 9 under former section 9-104(i). The first takes account of new section 9-340, which regulates the effectiveness of a set-off against a deposit account that stands as collateral. The second recognizes section 9-404, which affords the obligor on an account, chattel paper, or general intangible the right to raise claims and defenses against an assignee (secured party).
15. Tort Claims. Subsection (d)(12) narrows somewhat the broad exclusion of transfers of tort claims under former section 9-104(k). This article now applies to assignments of "commercial tort claims" (defined in section 9-102) as well as to security interests in tort claims that constitute proceeds of other collateral (e.g., a right to payment for negligent destruction of the debtor's inventory). Note that once a claim arising in tort has been settled and reduced to a contractual obligation to pay, the right to payment becomes a payment intangible and ceases to be a claim arising in tort.

    This article contains two special rules governing creation of a security interest in tort claims. First, a description of collateral in a security agreement as "all tort claims" is insufficient to meet the requirement for attachment. See section 9-108(e). Second, no security interest attaches under an after-acquired property clause to a tort claim. See section 9-204(b). In addition, this article does not determine whom the tortfeasor must pay to discharge its obligation. Inasmuch as a tortfeasor is not an "account debtor," the rules governing waiver of defenses and discharge of an obligation by an obligor (sections 9-403, 9-404, 9-405, and 9-406) are inapplicable to tort claim collateral.

16. Deposit Accounts. Except in consumer transactions, deposit accounts may be taken as original collateral under this article. Under former section 9-104(l), deposit accounts were excluded as original collateral, leaving security interests in deposit accounts to be governed by the common law. The common law is nonuniform, often difficult to discover and comprehend, and frequently costly to implement. As a consequence, debtors who wished to use deposit accounts as collateral sometimes were precluded from doing so as a practical matter. By excluding deposit accounts from the article's scope as original collateral in consumer transactions, subsection (d)(13) leaves those transactions to law other than this article. However, in both consumer and nonconsumer transactions, sections 9-315 and 9-322 apply to deposit accounts as proceeds and with respect to priorities in proceeds.

    This article contains several safeguards to protect debtors against inadvertently encumbering deposit accounts and to reduce the likelihood that a secured party will realize a windfall from a debtor's deposit accounts. For example, because "deposit account" is a separate type of collateral, a security agreement covering general intangibles will not adequately describe deposit accounts. Rather, a security agreement must reasonably identify the deposit accounts that are the subject of a security interest, e.g., by using the term "deposit accounts." See section 9-108. To perfect a security interest in a deposit account as original collateral, a secured party (other than the bank with which the deposit account is maintained) must obtain "control" of the account either by obtaining the bank's authenticated agreement or by becoming the bank's customer with respect to the deposit account. See sections 9-104 and 9-312(b)(1). Either of these steps requires the debtor's consent.

    This article also contains new rules that determine which state's law governs perfection and priority of a security interest in a deposit account (section 9-304), priority of conflicting security interests in and set-off rights against a deposit account (sections 9-327 and 9-340), the rights of transferees of funds from an encumbered deposit account (section 9-332), the obligations of the bank (section 9-341), enforcement of security interests in a deposit account (section 9-607(c)), and the duty of a secured party to terminate control of a deposit account (section 9-208(b)).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-113.

2. Background. Former section 9-113, from which this section derives, referred generally to security interests "arising solely under the Article on Sales (Article 2) or the Article on Leases (Article 2A)." Views differed as to the precise scope of that section. In contrast, section 9-110 specifies the security interests to which it applies.

3. Security Interests Under Articles 2 and 2A. Section 2-505 explains how a seller of goods may reserve a security interest in them. Section 2-401 indicates that a reservation of title by the seller of goods, despite delivery to the buyer, is limited to reservation of a security interest. As did former article 9, this article governs a security interest arising solely under one of those sections; however, until the buyer obtains possession of the goods, the security interest is enforceable even in the absence of a security agreement, filing is not necessary to perfect the security interest, and the seller-secured party's rights on the buyer's default are governed by article 2.

Sections 2-711(3) and 2A-508(5) create a security interest in favor of a buyer or lessee in possession of goods that were rightfully rejected or as to which acceptance was justifiably revoked. As did former article 9, this article governs a security interest arising solely under one of those sections; however, until the seller or lessor obtains possession of the goods, the security interest is enforceable even in the absence of a security agreement, filing is not necessary to perfect the security interest, and the secured party's (buyer's or lessee's) rights on the debtor's (seller's or lessor's) default are governed by article 2 or 2A, as the case may be.

4. Priority. This section adds to former section 9-113 a priority rule. Until the debtor obtains possession of the goods, a security interest arising under one of the specified sections of article 2 or 2A has priority over conflicting security interests created by the debtor. Thus, a security interest arising under section 2-401 or 2-505 has priority over a conflicting security interest in the buyer's after-acquired goods, even if the goods in question are inventory. Arguably, the same result would obtain under section 9-322, but even if it would not, a purchase-money-like priority is appropriate. Similarly, a security interest under section 2-711(3) or 2A-508(5) has priority over security interests claimed by the seller's or lessor's secured lender. This result is appropriate, inasmuch as the payments giving rise to the debt secured by the article 2 or 2A security interest are likely to be included among the lender's proceeds.

Example: Seller owns equipment subject to a security interest created by Seller in favor of Lender. Buyer pays for the equipment, accepts the goods, and then justifiably revokes acceptance. As long as Seller does not recover possession of the equipment, Buyer's security interest under section 2-711(3) is senior to that of Lender.

In the event that a security interest referred to in this section conflicts with a security interest that is created by a person other than the debtor, section 9-325 applies. Thus, if Lender's security interest in the example was created not by Seller but by the person from whom Seller acquired the goods, section 9-325 would govern.

5. Relationship to Other Rights and Remedies Under Articles 2 and 2A. This article does not specifically address the conflict between (i) a security interest created by a buyer or lessee and (ii) the seller's or lessor's right to withhold delivery under section 2-702(1), 2-703(a), or 2A-525, the seller's or lessor's right to stop delivery under section 2-705 or 2A-526, or the seller's right to reclaim under section 2-507(2) or 2-702(2). These conflicts are governed by the first sentence of section 2-403(1), under which the buyer's secured party obtains no greater rights in the goods than the buyer had or had power to convey, or section 2A-307(1), under which creditors of the lessee take subject to the lease contract.

CASE NOTES

Validity of unperfected security interest. - An unperfected security interest is only inferior to certain specific interests, such as that of an intervening judgment lien creditor without notice and is, therefore, not inferior to all interests; thus, a creditor with an unperfected security interest has a valid lien against the debtor enforceable in a nonbankruptcy forum. Felmey v. HFC, 9 Bankr. 331 (Bankr. E.D. Va. 1981).

Interest attaching. - Where debtor signed a security agreement granting a security interest in the car, value was given in the form of the credit union funds, and she gained rights in the vehicle, the credit union's security interest had attached, and was, therefore, enforceable against the debtor. In re Johnson, 179 Bankr. 800 (Bankr. E.D. Va. 1995).

Debtor by assigning his proceeds from dairy termination program to pay antecedent debt to creditor feed company created an enforceable security interest under § 8.9-105 (1) and this section when debtor signed federal form satisfying sections' requirements. Leake v. Valley Feed Co. (In re Propst), 81 Bankr. 406 (Bankr. W.D. Va. 1988).

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 9-201 and 9-203(4).

2. Effectiveness of Security Agreement. Subsection (a) provides that a security agreement is generally effective. With certain exceptions, a security agreement is effective between the debtor and secured party and is likewise effective against third parties. Note that "security agreement" is used here (and elsewhere in this article) as it is defined in section 9-102: "(A)n agreement that creates or provides for a security interest." It follows that subsection (a) does not provide that every term or provision contained in a record that contains a security agreement or that is so labeled is effective. Properly read, former section 9-201 was to the same effect. Exceptions to the general rule of subsection (a) arise where there is an overriding provision in this article or any other article of the UCC. For example, section 9-317 subordinates unperfected security interests to lien creditors and certain buyers, and several provisions in part 3 subordinate some security interests to other security interests and interests of purchasers.

3. Law, Statutes, and Regulations Applicable to Certain Transactions. Subsection (b) makes clear that certain transactions, although subject to this article, also are subject to other applicable laws relating to consumers or specified in that subsection. Subsection (c) provides that the other law is controlling in the event of a conflict, and that a violation of other law does not ipso facto constitute a violation of this article. Subsection (d) provides that this article does not validate violations under or extend the application of the other applicable laws.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-202.

2. Title Immaterial. The rights and duties of parties to a secured transaction and affected third parties are provided in this article without reference to the location of "title" to the collateral. For example, the characteristics of a security interest that secures the purchase price of goods are the same whether the secured party appears to have retained title or the debtor appears to have obtained title and then conveyed title or a lien to the secured party.

3. When Title Matters.

1. Under This Article. This section explicitly acknowledges two circumstances in which the effect of certain article 9 provisions turns on ownership (title). First, in some respects sales of accounts, chattel paper, payment intangibles, and promissory notes receive special treatment. See, e.g., sections 9-207(a), 9-210(b), and 9-615(e). Buyers of receivables under former article 9 were treated specially, as well. See, e.g., former section 9-502(2). Second, the remedies of a consignor under a true consignment and, for the most part, the remedies of a buyer of accounts, chattel paper, payment intangibles, or promissory notes are determined by other law and not by part 6. See section 9-601(g).
2. Under Other Law. This article does not determine which line of interpretation (e.g., title theory or lien theory, retained title or conveyed title) should be followed in cases in which the applicability of another rule of law depends upon who has title. If, for example, a revenue law imposes a tax on the "legal" owner of goods or if a corporation law makes a vote of the stockholders prerequisite to a corporation "giving" a security interest but not if it acquires property "subject" to a security interest, this article does not attempt to define whether the secured party is a "legal" owner or whether the transaction "gives" a security interest for the purpose of such laws. Other rules of law or the agreement of the parties determines the location and source of title for those purposes.

CASE NOTES

Former § 8.9-203 (1) (a) is in the nature of a statute of frauds, one purpose of which is evidentiary; that is, to minimize the possibility of future dispute as to the terms of a security agreement and as to what property stands as collateral for the obligation secured. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

And compliance with it is required. - A security interest which has "attached" and is "perfected" by filing may nevertheless be unenforceable because of failure to comply with subsection (1) (a). In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

Requisites of former § 8.9-203 (1) (a) serve an evidentiary function by requiring a signed agreement and obviate any statute of frauds problems between the debtor and creditor by requiring a writing. Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

Instrument in form of trust receipt satisfies subsection former § 8.9-203 (1) (a). - The requirement of a written security agreement in subsection (1) (a) of former § 8.9-203 could have been satisfied by an instrument which took the form of a trust receipt. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

Deed of trust as agreement for security interest. - In an action challenging the validity of a security interest, a deed of trust qualified as an agreement for the purpose of security interest in personalty under Virginia law since the debtor signed the deed of trust to the creditor and the collateral was sufficiently described as "all furniture, furnishings, equipment, machinery and all other personal property located on the premises." United Va. Bank/Seaboard Nat'l v. B.F. Saul Real Estate Inv. Trust, 641 F.2d 185 (4th Cir. 1981).

Enforceable security interest must be evidenced by writing signed by the debtor which describes the collateral. Bryant v. Secretary, United States Dep't of Agric., 227 Bankr. 89 (W.D. Va. 1998), aff'd, 181 F.3d 86 (4th Cir. 1999).

A security interest does not attach unless the debtor has signed a security agreement describing the collateral, value has been given, and the debtor has rights in the collateral. In re Johnson, 179 Bankr. 800 (Bankr. E.D. Va. 1995).

Time security interest attaches. - Trustee's right to proceeds of sale of collateral of debtor was superior to that of other creditors holding a lien created by reason of a judgment and a related garnishment because an "account" within the meaning of § 8.9A-102(a)(2) came into existence at the moment that debtor accepted third party purchase orders for the collateral, at which time title passed to the third party buyers by operation of § 8.2-401(3)(b), and the trustee's security interest attached thereto by operation of § 8.9A-203 . The resulting right to payment and the funds used as payment were "proceeds" within the meaning of § 8.9A-102 (64) in which the trustee had an interest superior to that of the competing creditors, and § 8.9A-317 did not require a different result given these facts. Swanson v. Applied Process Tech. Int'l, LLC (In re Delta-T Corp.), 475 Bankr. 495, 2012 Bankr. LEXIS 3091 (Bankr. E.D. Va. 2012).

Possession sufficient to predicate attachment of security interest. - As possession with contingent rights of ownership is sufficient to predicate the attachment of a security interest under this section, when coupled with actual payment, it is a fortiori sufficient. In re County Green Ltd. Partnership, 438 F. Supp. 693 (W.D. Va. 1977).

Owner must sign if debtor and owner are different people. - Under the provisions of the Code, if the debtor and owner actually were different people, then "debtor" meant the owner, and the owner had to sign the agreement under subsection (1) (a) of former § 8.9-203 for the security interest to be enforceable. Where the true owner did not sign the agreement, it failed to meet this requirement. Northwestern Bank v. First Va. Bank, 585 F. Supp. 425 (W.D. Va. 1984).

Enforceability against third parties. - In order that a security interest become enforceable against third parties, two steps are required; (1) the interest must attach and (2) be perfected. In re Johnson, 179 Bankr. 800 (Bankr. E.D. Va. 1995).

Secured creditor's objection to use of cash collateral by a debtor-in-possession was overruled because the creditor did not provide adequate evidence that the creditor had a valid security interest in the cash collateral when the creditor's financing statement addressed only a security interest in consigned inventory and a third party would not find reason to pursue further the extent of the creditor's security interest. In re Holladay House, Inc., 387 Bankr. 689, 2008 Bankr. LEXIS 758 (Bankr. E.D. Va. 2008), aff'd, 2008 U.S. Dist. LEXIS 84405 (E.D. Va. 2008).

Two documents required for perfected security interest. - Generally, two documents are required to create a perfected security interest in a debtor's collateral. First, a security agreement must give a creditor an interest in the collateral. The second document required is a financing statement, a writing filed for public record. Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

Financing statement and security agreements furnished sufficient description of collateral. - Where the parties executed security agreements providing that the collateral described therein could be supplemented, i.e., added to, by financing statements signed by the debtors, financing statement, coupled with security agreements, furnished a sufficient description of the collateral under former § 8.9-110, and met the requirements of subsection (1) (a) of former § 8.9-203. Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

Secured party's mere possession of collateral not sufficient to establish a security interest. A security interest does not attach unless the collateral is in the possession of the secured party pursuant to agreement and the evidence of agreement must establish that the secured party possesses the collateral for the purpose of securing the debtor's obligation. Grossmann v. Saunders, 237 Va. 113 , 376 S.E.2d 66 (1989).

As between the parties, financing statement can supplement security agreements by adding collateral. - Nothing in the U.C.C. prohibits parties from contracting to supplement a security agreement with a separate document adding other collateral; thus, as between the parties, the financing statement can supplement the underlying security agreement by adding other collateral. Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

Supplies had not become fixtures. - Electrical supplies to be installed in a school under construction had not become fixtures, as defined by former § 8.9-313 (1) (a), at the time the electrical contractor's creditor bank sought to take possession thereof, and thus the creditor need not have filed its financing statement as a fixture filing under former § 8.9-401 (1) (b). Where the bank made a proper filing under former § 8.9-401 (1) (c), the bank thus acquired a perfected security interest in the electrical supplies. Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844 , 263 S.E.2d 408 (1980).

Security interest continues notwithstanding sales, and continues in proceeds. - Under the terms of former § 8.9-306 (2), a security interest continued in collateral notwithstanding sales, and also continued in any identifiable proceeds. John Deskins Pic Pac, Inc. v. Flat Top Nat'l Bank, 59 Bankr. 809 (Bankr. W.D. Va. 1986).

Burden of proof. - Where the allegations contained in the motion for judgment and the inferences deducible therefrom did not establish that defendant had obligations to the bank but merely demonstrate that he gave or transferred the notes to the bank, and the bank subsequently received payments collected on the notes required an evidentiary hearing to establish that defendant provided the bank with a security interest in the notes for the purpose of securing an obligation he has to each party since if the bank could not show that possession of the notes was taken with the purpose of creating a security interest, their possession could not operate to give them a perfected possessory security interest. Grossmann v. Saunders, 237 Va. 113 , 376 S.E.2d 66 (1989).

Defendant had sufficient rights in collateral to predicate the attachment of a security interest under subsection (1) (c) of former § 8.9-203 since defendant, the debtor, retained possession of the notes pursuant to an agreement that clearly endowed him with contingent rights of ownership. Grossmann v. Saunders, 237 Va. 113 , 376 S.E.2d 66 (1989).

Signing requirement met. - The fact that debtor's signature did not appear on the original contract did not destroy creditor's interest in all items purchased on or before that date given that the debtor did not dispute any relevant fact regarding her purchases and the intent of the parties. The fact that she signed the delivery copy of the original contract was sufficient to meet the signing requirement of this section. In re Leftwich, 174 Bankr. 54 (Bankr. W.D. Va. 1994).

Signing requirement not met. - Because the automobile purchaser did not sign a security agreement, he maintained that the seller had no enforceable security interest in the car, and the court agreed; without such a security interest, it was improper for the seller to place a lien on the title to the car. Accordingly, the court entered an order declaring the seller's security interest in the car void and unenforceable further, that order directed the seller to release the lien, to give the car's title back to the purchaser, and to return to the purchaser any keys to the vehicle that he was holding. Hummel v. Hall,, 2012 U.S. Dist. LEXIS 84305 (W.D. Va. June 19, 2012).

Applied in Phillips v. Household Auto. Fin. Corp. (In re Berzito),, 2005 Bankr. LEXIS 279 (Bankr. E.D. Va. Jan. 24, 2005).

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. Former sections 9-115(2), (6) and 9-203.
2. Creation, Attachment, and Enforceability. Subsection (a) states the general rule that a security interest attaches to collateral only when it becomes enforceable against the debtor. Subsection (b) specifies the circumstances under which a security interest becomes enforceable. Subsection (b) states three basic prerequisites to the existence of a security interest: Value (paragraph (1)), rights or power to transfer rights in collateral (paragraph (2)), and agreement plus satisfaction of an evidentiary requirement (paragraph (3)). When all of these elements exist, a security interest becomes enforceable between the parties and attaches under subsection (a). Subsection (c) identifies certain exceptions to the general rule of subsection (b).
3. Security Agreement; Authentication. Under subsection (b)(3), enforceability requires the debtor's security agreement and compliance with an evidentiary requirement in the nature of a statute of frauds. Paragraph (3)(A) represents the most basic of the evidentiary alternatives, under which the debtor must authenticate a security agreement that provides a description of the collateral. Under section 9-102, a "security agreement" is "an agreement that creates or provides for a security interest." Neither that definition nor the requirement of paragraph (3)(A) rejects the deeply rooted doctrine that a bill of sale, although absolute in form, may be shown in fact to have been given as security. Under this article, as under prior law, a debtor may show by parol evidence that a transfer purporting to be absolute was in fact for security. Similarly, a self-styled "lease" may serve as a security agreement if the agreement creates a security interest. See section 1-203 (distinguishing security interest from lease).
4. Possession, Delivery, or Control Pursuant to Security Agreement. The other alternatives in subsection (b)(3) dispense with the requirement of an authenticated security agreement and provide alternative evidentiary tests. Under paragraph (3)(B), the secured party's possession substitutes for the debtor's authentication under paragraph (3)(A) if the secured party's possession is "pursuant to the debtor's security agreement." That phrase refers to the debtor's agreement to the secured party's possession for the purpose of creating a security interest. The phrase should not be confused with the phrase "debtor has authenticated a security agreement," used in paragraph (3)(A), which contemplates the debtor's authentication of a record. In the unlikely event that possession is obtained without the debtor's agreement, possession would not suffice as a substitute for an authenticated security agreement. However, once the security interest has become enforceable and has attached, it is not impaired by the fact that the secured party's possession is maintained without the agreement of a subsequent debtor (e.g., a transferee). Possession as contemplated by section 9-313 is possession for purposes of subsection (b)(3)(B), even though it may not constitute possession "pursuant to the debtor's agreement" and consequently might not serve as a substitute for an authenticated security agreement under subsection (b)(3)(A). Subsection (b)(3)(C) provides that delivery of a certificated security to the secured party under section 8-301 pursuant to the debtor's security agreement is sufficient as a substitute for an authenticated security agreement. Similarly, under subsection (b)(3)(D), control of investment property, a deposit account, electronic chattel paper, or a letter-of-credit right satisfies the evidentiary test if control is pursuant to the debtor's security agreement.
5. Collateral Covered by Other Statute or Treaty. One evidentiary purpose of the formal requisites stated in subsection (b) is to minimize the possibility of future disputes as to the terms of a security agreement (e.g., as to the property that stands as collateral for the obligation secured). One should distinguish the evidentiary functions of the formal requisites of attachment and enforceability (such as the requirement that a security agreement contain a description of the collateral) from the more limited goals of "notice filing" for financing statements under part 5, explained in section 9-502, comment 2. When perfection is achieved by compliance with the requirements of a statute or treaty described in section 9-311(a), such as a federal recording act or a certificate-of-title statute, the manner of describing the collateral in a registry imposed by the statute or treaty may or may not be adequate for purposes of this section and section 9-108. However, the description contained in the security agreement, not the description in a public registry or on a certificate of title, controls for purposes of this section.
6. Debtor's Rights; Debtor's Power to Transfer Rights. Subsection (b)(2) conditions attachment on the debtor's having "rights in the collateral or the power to transfer rights in the collateral to a secured party." A debtor's limited rights in collateral, short of full ownership, are sufficient for a security interest to attach. However, in accordance with basic personal property conveyancing principles, the baseline rule is that a security interest attaches only to whatever rights a debtor may have, broad or limited as those rights may be.

   Certain exceptions to the baseline rule enable a debtor to transfer, and a security interest to attach to, greater rights than the debtor has. See part 3, subpart 3 (priority rules). The phrase, "or the power to transfer rights in the collateral to a secured party," accommodates those exceptions. In some cases, a debtor may have power to transfer another person's rights only to a class of transferees that excludes secured parties. See, e.g., section 2-403(2) (giving certain merchants power to transfer an entruster's rights to a buyer in ordinary course of business). Under those circumstances, the debtor would not have the power to create a security interest in the other person's rights, and the condition in subsection (b)(2) would not be satisfied.

7. New Debtors. Subsection (e) makes clear that the enforceability requirements of subsection (b)(3) are met when a new debtor becomes bound under an original debtor's security agreement. If a new debtor becomes bound as debtor by a security agreement entered into by another person, the security agreement satisfies the requirement of subsection (b)(3) as to the existing and after-acquired property of the new debtor to the extent the property is described in the agreement.

   Subsection (d) explains when a new debtor becomes bound. Persons who become bound under paragraph (2) are limited to those who both become primarily liable for the original debtor's obligations and succeed to (or acquire) its assets. Thus, the paragraph excludes sureties and other secondary obligors as well as persons who become obligated through veil piercing and other nonsuccessorship doctrines. In many cases, paragraph (2) will exclude successors to the assets and liabilities of a division of a debtor. See also section 9-508, comment 3.

8. Supporting Obligations. Under subsection (f), a security interest in a "supporting obligation" (defined in section 9-102) automatically follows from a security interest in the underlying, supported collateral. This result was implicit under former article 9. Implicit in subsection (f) is the principle that the secured party's interest in a supporting obligation extends to the supporting obligation only to the extent that it supports the collateral in which the secured party has a security interest. Complex issues may arise, however, if a supporting obligation supports many separate obligations of a particular account debtor and if the supported obligations are separately assigned as security to several secured parties. The problems may be exacerbated if a supporting obligation is limited to an aggregate amount that is less than the aggregate amount of the obligations it supports. This article does not contain provisions dealing with competing claims to a limited supporting obligation. As under former article 9, the law of suretyship and the agreements of the parties will control.
9. Collateral Follows Right to Payment or Performance. Subsection (g) codifies the common law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien. See Restatement (3d), Property (Mortgages) section 5.4(a) (1997). See also section 9-308(e) (analogous rule for perfection).
10. Investment Property. Subsections (h) and (i) make clear that attachment of a security interest in a securities account or commodity account is also attachment in security entitlements or commodity contracts carried in the accounts.

CASE NOTES

When security interest attaches. - A security interest is said to attach as soon as there is agreement that it attaches, value is given, and the debtor has rights in the collateral. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

The intent of a debtor to grant a security interest in after-acquired property must be determined from the language of the agreement itself. Northern Va. Bank v. Vecco Constr. Indus., Inc., 9 Bankr. 866 (Bankr. E.D. Va. 1981).

Determination of when debtor acquires rights in collateral. - Any or all obligations set out in a security agreement may be secured by after-acquired collateral in Virginia; however, no security interest may be enforced or attached until the debtor has rights in the collateral and, further, it is left to the courts to determine when a debtor acquires rights in the collateral in question. Northern Va. Bank v. Vecco Constr. Indus., Inc., 9 Bankr. 866 (Bankr. E.D. Va. 1981).

Interest in after-acquired accounts receivable found. - Under Virginia law, security agreement granted movants an interest in after-acquired accounts receivable, as well as those accounts receivable held by debtor when security agreement was executed. Claytor v. Shenandoah Whse. Co., 202 Bankr. 871 (Bankr. W.D. Va. 1996).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-204.

2. After-Acquired Property; Continuing General Lien. Subsection (a) makes clear that a security interest arising by virtue of an after-acquired property clause is no less valid than a security interest in collateral in which the debtor has rights at the time value is given. A security interest in after-acquired property is not merely an "equitable" interest; no further action by the secured party - such as a supplemental agreement covering the new collateral - is required. This section adopts the principle of a "continuing general lien" or "floating lien." It validates a security interest in the debtor's existing and (upon acquisition) future assets, even though the debtor has liberty to use or dispose of collateral without being required to account for proceeds or substitute new collateral. See section 9-205. Subsection (a), together with subsection (c), also validates "cross-collateral" clauses under which collateral acquired at any time secures advances whenever made.

3. After-Acquired Consumer Goods. Subsection (b)(1) makes ineffective an after-acquired property clause covering consumer goods (defined in section 9-109), except as accessions (see section 9-335), acquired more than 10 days after the secured party gives value. Subsection (b)(1) is unchanged in substance from the corresponding provision in former section 9-204(2).

4. Commercial Tort Claims. Subsection (b)(2) provides that an after-acquired property clause in a security agreement does not reach future commercial tort claims. In order for a security interest in a tort claim to attach, the claim must be in existence when the security agreement is authenticated. In addition, the security agreement must describe the tort claim with greater specificity than simply "all tort claims." See section 9-108(e).

5. Future Advances; Obligations Secured. Under subsection (c) collateral may secure future as well as past or present advances if the security agreement so provides. This is in line with the policy of this article toward security interests in after-acquired property under subsection (a). Indeed, the parties are free to agree that a security interest secures any obligation whatsoever. Determining the obligations secured by collateral is solely a matter of construing the parties' agreement under applicable law. This article rejects the holdings of cases decided under former article 9 that applied other tests, such as whether a future advance or other subsequently incurred obligation was of the same or a similar type or class as earlier advances and obligations secured by the collateral.

6. Sales of Receivables. Subsections (a) and (c) expressly validate after-acquired property and future advance clauses not only when the transaction is for security purposes but also when the transaction is the sale of accounts, chattel paper, payment intangibles, or promissory notes. This result was implicit under former article 9.

7. Financing Statements. The effect of after-acquired property and future advance clauses as components of a security agreement should not be confused with the requirements applicable to financing statements under this article's system of perfection by notice filing. The references to after-acquired property clauses and future advance clauses in this section are limited to security agreements. There is no need to refer to after-acquired property or future advances or other obligations secured in a financing statement. See section 9-502, comment 2.

CASE NOTES

Placement of section. - No state other than Virginia includes a provision like former § 8.9A-204 in Article 9 of its version of the U.C.C. Such provisions are more often found in installment sales acts. In re Leftwich, 174 Bankr. 54 (Bankr. W.D. Va. 1994).

Protection afforded. - Former § 8.9-204.1 protected debtors from a seller's use of a purchase money security agreement to satisfy a payment deficiency by proceeding against all of the items debtors purchased over an extended period. Butterworth Furn. Co. v. Penny, 15 Bankr. 124 (Bankr. E.D. Va. 1981).

Open-end credit terms are initially established when the credit plan is created but no fixed amount of debt is incurred at that time. Butterworth Furn. Co. v. Penny, 15 Bankr. 124 (Bankr. E.D. Va. 1981).

Purchase money security interest not automatically destroyed by refinancing or consolidation. - Former § 8.9A-204.1 did not expressly provide that the interest which was protected by compliance with its provisions was necessarily a purchase money security interest as defined in former § 8.9-107(a). However, nothing in former § 8.9A-204.1 indicated that refinancing a consumer purchase precluded retaining a purchase money security interest and the fact that Virginia enacted the provision as part of Article 9 of the U.C.C. supported a finding that a refinancing or consolidation did not automatically destroy an existing purchase money security interest. In re Leftwich, 174 Bankr. 54 (Bankr. W.D. Va. 1994).

Valid purchase money security interest held. - Where parties did not intend that each transaction they entered into constitute a novation of their prior transactions - it was clear that they intended that creditor retain a security interest in all property purchased to the extent of its purchase price, and because the installment sale and security agreement used by creditor provided a method of allocating payments that complied with the requirements of former § 8.9-204.1, creditor held a valid purchase money security interest in part of the property which the debtor purchased from it. In re Leftwich, 174 Bankr. 54 (Bankr. W.D. Va. 1994).

CASE NOTES

There was no waiver of creditor's security interest arising from its action in permitting debtor to retain possession of the collateral, including proceeds, and to use them in the ordinary course of its business. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-205.

2. Validity of Unrestricted "Floating Lien." This article expressly validates the "floating lien" on shifting collateral. See sections 9-201, 9-204, and comment 2. This section provides that a security interest is not invalid or fraudulent by reason of the debtor's liberty to dispose of the collateral without being required to account to the secured party for proceeds or substitute new collateral. As did former section 9-205, this section repeals the rule of Benedict v. Ratner, 268 U.S. 353 (1925), and other cases which held such arrangements void as a matter of law because the debtor was given unfettered dominion or control over collateral. The Benedict rule did not effectively discourage or eliminate security transactions in inventory and receivables. Instead, it forced financing arrangements to be self-liquidating. Although this section repeals Benedict, the filing and other perfection requirements (see part 3, subpart 2, and part 5) provide for public notice that overcomes any potential misleading effects of a debtor's use and control of collateral. Moreover, nothing in this section prevents the debtor and secured party from agreeing to procedures by which the secured party polices or monitors collateral or to restrictions on the debtor's dominion. However, this article leaves these matters to agreement based on business considerations, not on legal requirements.

3. Possessory Security Interests. Subsection (b) makes clear that this section does not relax the requirements for perfection by possession under section 9-315. If a secured party allows the debtor access to and control over collateral its security interest may be or become unperfected.

4. Permissible Freedom for Debtor to Enforce Collateral. Former section 9-205 referred to a debtor's "liberty ... to collect or compromise accounts or chattel paper." This section recognizes the broader rights of a debtor to "enforce," as well as to "collect" and "compromise" collateral. This section's reference to collecting, compromising, and enforcing "collateral" instead of "accounts or chattel paper" contemplates the many other types of collateral that a debtor may wish to "collect, compromise, or enforce": E.g., deposit accounts, documents, general intangibles, instruments, investment property, and letter-of-credit rights.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-116.

2. Codification of "Broker's Lien." Depending upon a securities intermediary's arrangements with its entitlement holders, the securities intermediary may treat the entitlement holder as entitled to financial assets before the entitlement holder has actually made payment for them. For example, many brokers permit retail customers to pay for financial assets by check. The broker may not receive final payment of the check until several days after the broker has credited the customer's securities account for the financial assets. Thus, the customer will have acquired a security entitlement prior to payment. Subsection (a) provides that, in such circumstances, the securities intermediary has a security interest in the entitlement holder's security entitlement. Under subsection (b) the security interest secures the customer's obligation to pay for the financial asset in question. Subsections (a) and (b) codify and adapt to the indirect holding system the so-called "broker's lien," which has long been recognized. See Restatement, Security section 12.

3. Financial Assets Delivered Against Payment. Subsection (c) creates a security interest in favor of persons who deliver certificated securities or other financial assets in physical form, such as money market instruments, if the agreed payment is not received. In some arrangements for settlement of transactions in physical financial assets, the seller's securities custodian will deliver physical certificates to the buyer's securities custodian and receive a time-stamped delivery receipt. The buyer's securities custodian will examine the certificate to ensure that it is in good order, and that the delivery matches a trade in which the buyer has instructed the seller to deliver to that custodian. If all is in order, the receiving custodian will settle with the delivering custodian through whatever funds settlement system has been agreed upon or is used by custom and usage in that market. The understanding of the trade, however, is that the delivery is conditioned upon payment, so that if payment is not made for any reason, the security will be returned to the deliverer. Subsection (c) clarifies the rights of persons making deliveries in such circumstances. It provides the person making delivery with a security interest in the securities or other financial assets; under subsection (d), the security interest secures the seller's right to receive payment for the delivery. Section 8-301 specifies when delivery of a certificated security occurs; that section should be applied as well to other financial assets as well for purposes of this section.

4. Automatic Attachment and Perfection. Subsections (a) and (c) refer to attachment of a security interest. Attachment under this section has the same incidents (enforceability, right to proceeds, etc.) as attachment under section 9-203. This section overrides the general attachment rules in section 9-203. See section 9-203(c). A securities intermediary's security interest under subsection (a) is perfected by control without further action. See sections 8-106 (control) and 9-314 (perfection). Security interests arising under subsection (c) are automatically perfected. See section 9-309(9).

SubPart 2. Rights and Duties.

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. Former section 9-207.
2. Duty of Care for Collateral in Secured Party's Possession. Like former section 9-207, subsection (a) imposes a duty of care, similar to that imposed on a pledgee at common law, on a secured party in possession of collateral. See Restatement, Security sections 17 and 18. In many cases a secured party in possession of collateral may satisfy this duty by notifying the debtor of action that should be taken and allowing the debtor to take the action itself. If the secured party itself takes action, its reasonable expenses may be added to the secured obligation. The revised definitions of "collateral," "debtor," and "secured party" in section 9-102 make this section applicable to collateral subject to an agricultural lien if the collateral is in the lienholder's possession. Under section 1-302 the duty to exercise reasonable care may not be disclaimed by agreement, although under that section the parties remain free to determine by agreement standards that are not manifestly unreasonable as to what constitutes reasonable care. Unless otherwise agreed, for a secured party in possession of chattel paper or an instrument, reasonable care includes the preservation of rights against prior parties. The secured party's right to have instruments or documents indorsed or transferred to it or its order is dealt with in the relevant sections of articles 3, 7, and 8. See sections 3-203(c), 7-506, and 8-304(d).
3. Specific Rules When Secured Party in Possession or Control of Collateral. Subsections (b) and (c) provide rules following common law precedents which apply unless the parties otherwise agree. The rules in subsection (b) apply to typical issues that may arise while a secured party is in possession of collateral, including expenses, insurance, and taxes, risk of loss or damage, identifiable and fungible collateral, and use or operation of collateral. Subsection (c) contains rules that apply in certain circumstances that may arise when a secured party is in either possession or control of collateral. These circumstances include the secured party's receiving proceeds from the collateral and the secured party's creation of a security interest in the collateral.
4. Applicability Following Default. This section applies when the secured party has possession of collateral either before or after default. See sections 9-601(b) and 9-609. Subsection (b)(4)(C) limits agreements concerning the use or operation of collateral to collateral other than consumer goods. Under section 9-602(1), a debtor cannot waive or vary that limitation.
5. "Repledges" and Right of Redemption. Subsection (c)(3) eliminates the qualification in former section 9-207 to the effect that the terms of a "repledge" may not "impair" a debtor's "right to redeem" collateral. The change is primarily for clarification. There is no basis on which to draw from subsection (c)(3) any inference concerning the debtor's right to redeem the collateral. The debtor enjoys that right under section 9-623; this section need not address it. For example, if the collateral is a negotiable note that the secured party (SP-1) repledges to SP-2, nothing in this section suggests that the debtor (D) does not retain the right to redeem the note upon payment to SP-1 of all obligations secured by the note. But, as explained below, the debtor's unimpaired right to redeem as against the debtor's original secured party nevertheless may not be enforceable as against the new secured party.

   In resolving questions that arise from the creation of a security interest by SP-1, one must take care to distinguish D's rights against SP-1 from D's rights against SP-2. Once D discharges the secured obligation, D becomes entitled to the note; SP-1 has no legal basis upon which to withhold it. If, as a practical matter, SP-1 is unable to return the note because SP-2 holds it as collateral for SP-1's unpaid debt, then SP-1 is liable to D under the law of conversion.

   Whether SP-2 would be liable to D depends on the relative priority of SP-2's security interest and D's interest. By permitting SP-1 to create a security interest in the collateral (repledge), subsection (c)(3) provides a statutory power for SP-1 to give SP-2 a security interest (subject, of course, to any agreement by SP-1 not to give a security interest). In the vast majority of cases where repledge rights are significant, the security interest of the second secured party, SP-2 in the example, will be senior to the debtor's interest. By virtue of the debtor's consent or applicable legal rules, SP-2 typically would cut off D's rights in investment property or be immune from D's claims. See sections 3-306 and 9-331 (holder in due course), 8-303 (protected purchaser), 8-502 (acquisition of a security entitlement), and 8-503(e) (action by entitlement holder). Moreover, the expectations and business practices in some markets, such as the securities markets, are such that D's consent to SP-2's taking free of D's rights inheres in D's creation of SP-1's security interest which gives rise to SP-1's power under this section. In these situations, D would have no right to recover the collateral or recover damages from SP-2. Nevertheless, D would have a damage claim against SP-1 if SP-1 had given a security interest to SP-2 in breach of its agreement with D. Moreover, if SP-2's security interest secures an amount that is less than the amount secured by SP-1's security interest (granted by D), then D's exercise of its right to redeem would provide value sufficient to discharge SP-1's obligations to SP-2.

   For the most part this section does not change the law under former section 9-207, although eliminating the reference to the debtor's right of redemption may alter the secured party's right to repledge in one respect. Former section 9-207 could have been read to limit the secured party's statutory right to repledge collateral to repledge transactions in which the collateral did not secure a greater obligation than that of the original debtor. Inasmuch as this is a matter normally dealt with by agreement between the debtor and secured party, any change would appear to have little practical effect.

6. "Repledges" of Investment Property. The following example will aid the discussion of "repledges" of investment property.

   Example. Debtor grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. Alpha does not have an account with Able. Alpha uses Beta Bank as its securities custodian. Debtor instructs Able to transfer the shares to Beta, for the account of Alpha, and Able does so. Beta then credits Alpha's account. Alpha has control of the security entitlement for the 1000 shares under section 8-106(d). (These are the facts of Example 2, section 8-106, comment 4.) Although, as between Debtor and Alpha, Debtor may have become the beneficial owner of the new securities entitlement with Beta, Beta has agreed to act on Alpha's entitlement orders because, as between Beta and Alpha, Alpha has become the entitlement holder.

   Next, Alpha grants Gamma Bank a security interest in the security entitlement with Beta that includes the 1000 shares of XYZ Co. stock. In order to afford Gamma control of the entitlement, Alpha instructs Beta to transfer the stock to Gamma's custodian, Delta Bank, which credits Gamma's account for 1000 shares. At this point Gamma holds its securities entitlement for its benefit as well as that of its debtor, Alpha. Alpha's derivative rights also are for the benefit of Debtor.

   In many, probably most, situations and at any particular point in time, it will be impossible for Debtor or Alpha to "trace" Alpha's "repledge" to any particular securities entitlement or financial asset of Gamma or anyone else. Debtor would retain, of course, a right to redeem the collateral from Alpha upon satisfaction of the secured obligation. However, in the absence of a traceable interest, Debtor would retain only a personal claim against Alpha in the event Alpha failed to restore the security entitlement to Debtor. Moreover, even in the unlikely event that Debtor could trace a property interest, in the context of the financial markets, normally the operation of this section, Debtor's explicit agreement to permit Alpha to create a senior security interest, or legal rules permitting Gamma to cut off Debtor's rights or become immune from Debtor's claims would effectively subordinate Debtor's interest to the holder of a security interest created by Alpha. And, under the shelter principle, all subsequent transferees would obtain interests to which Debtor's interest also would be subordinate.

7. Buyers of Chattel Paper and Other Receivables; Consignors. This section has been revised to reflect the fact that a seller of accounts, chattel paper, payment intangibles, or promissory notes retains no interest in the collateral and so is not disadvantaged by the secured party's noncompliance with the requirements of this section. Accordingly, subsection (d) provides that subsection (a) applies only to security interests that secure an obligation and to sales of receivables in which the buyer has recourse against the debtor. (Of course, a buyer of accounts or payment intangibles could not have "possession" of original collateral, but might have possession of proceeds, such as promissory notes or checks.) The meaning of "recourse" in this respect is limited to recourse arising out of the account debtor's failure to pay or other default.

   Subsection (d) makes subsections (b) and (c) inapplicable to buyers of accounts, chattel paper, payment intangibles, or promissory notes and consignors. Of course, there is no reason to believe that a buyer of receivables or a consignor could not, for example, create a security interest or otherwise transfer an interest in the collateral, regardless of who has possession of the collateral. However, this section leaves the rights of those owners to law other than article 9.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Scope and Purpose. This section imposes duties on a secured party who has control of a deposit account, electronic chattel paper, investment property, or a letter-of-credit right. The duty to terminate the secured party's control is analogous to the duty to file a termination statement, imposed by section 9-513. Under subsection (a), it applies only when there is no outstanding secured obligation and the secured party is not committed to give value. The requirements of this section can be varied by agreement under section 1-102(3). For example, a debtor could by contract agree that the secured party may comply with subsection (b) by releasing control more than 10 days after demand. Also, duties under this section should not be read to conflict with the terms of the collateral itself. For example, if the collateral is a time deposit account, subsection (b)(2) should not require a secured party with control to make an early withdrawal of the funds (assuming that were possible) in order to pay them over to the debtor or put them in an account in the debtor's name.

3. Remedy for Failure to Relinquish Control. If a secured party fails to comply with the requirements of subsection (b), the debtor has the remedy set forth in section 9-625(e). This remedy is identical to that applicable to failure to provide or file a termination statement under section 9-513.

4. Duty to Relinquish Possession. Although section 9-207 addresses directly the duties of a secured party in possession of collateral, that section does not require the secured party to relinquish possession when the secured party ceases to hold a security interest. Under common law, absent agreement to the contrary, the failure to relinquish possession of collateral upon satisfaction of the secured obligation would constitute a conversion. Inasmuch as problems apparently have not surfaced in the absence of statutory duties under former article 9 and the common law duty appears to have been sufficient, this article does not impose a statutory duty to relinquish possession.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Scope and Purpose. Like sections 9-208 and 9-513, which require a secured party to relinquish control of collateral and to file or provide a termination statement for a financing statement, this section requires a secured party to free up collateral when there no longer is any outstanding secured obligation or any commitment to give value in the future. This section addresses the case in which account debtors have been notified to pay a secured party to whom the receivables have been assigned. It requires the secured party (assignee) to inform the account debtors that they no longer are obligated to make payment to the secured party. See subsection (b). It does not apply to account debtors whose obligations on an account, chattel paper, or payment intangible have been sold. See subsection (c).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-208.

2. Scope and Purpose. This section provides a procedure whereby a debtor may obtain from a secured party information about the secured obligation and the collateral in which the secured party may claim a security interest. It clarifies and resolves some of the issues that arose under former section 9-208 and makes information concerning the secured indebtedness readily available to debtors, both before and after default. It applies to agricultural lien transactions (see the definitions of "debtor," "secured party," and "collateral" in section 9-102), but generally not to sales of receivables. See subsection (b).

3. Requests by Debtors Only. A financing statement filed under part 5 may disclose only that a secured party may have a security interest in specified types of collateral. In most cases the financing statement will contain no indication of the obligation (if any) secured, whether any security interest actually exists, or the particular property subject to a security interest. Because creditors of and prospective purchasers from a debtor may have legitimate needs for more detailed information, it is necessary to provide a procedure under which the secured party will be required to provide information. On the other hand, the secured party should not be under a duty to disclose any details of the debtor's financial affairs to any casual inquirer or competitor who may inquire. For this reason, this section gives the right to request information to the debtor only. The debtor may submit a request in connection with negotiations with subsequent creditors and purchasers, as well as for the purpose of determining the status of its credit relationship or demonstrating which of its assets are free of a security interest.

4. Permitted Types of Requests for Information. Subsection (a) contemplates that a debtor may request three types of information by submitting three types of "requests" to the secured party. First, the debtor may request the secured party to prepare and send an "accounting" (defined in section 9-102). Second, the debtor may submit to the secured party a list of collateral for the secured party's approval or correction. Third, the debtor may submit to the secured party for its approval or correction a statement of the aggregate amount of unpaid secured obligations. Inasmuch as a secured party may have numerous transactions and relationships with a debtor, each request must identify the relevant transactions or relationships. Subsections (b) and (c) require the secured party to respond to a request within 14 days following receipt of the request.

5. Recipients Claiming No Interest in the Transaction. A debtor may be unaware that a creditor with whom it has dealt has assigned its security interest or the secured obligation. Subsections (d) and (e) impose upon recipients of requests under this section the duty to inform the debtor that they claim no interest in the collateral or secured obligation, respectively, and to inform the debtor of the name and mailing address of any known assignee or successor. As under subsections (b) and (c), a response to a request under subsection (d) or (e) is due 14 days following receipt.

6. Waiver; Remedy for Failure to Comply. The debtor's rights under this section may not be waived or varied. See section 9-602(2). Section 9-625 sets forth the remedies for noncompliance with the requirements of this section.

7. Limitation on Free Responses to Requests. Under subsection (f), during a six-month period a debtor is entitled to receive from the secured party one free response to a request. The debtor is not entitled to a free response to each type of request (i.e., three free responses) during a six-month period.

CASE NOTES

The scope and policy of former Title 8.9 was stated in former § 8.9-102, and certain multiple state and other transactions were excepted by former §§ 8.9-103 and 8.9-104 from the remaining provisions of former Title 8.9. In re Smith, 311 F. Supp. 900 (W.D. Va. 1970), aff'd sub nom. Callaghan v. Commercial Credit Corp., 437 F.2d 898 (4th Cir. 1971).

Unless displaced by the Uniform Commercial Code, a state's prior commercial law supplements the Code. In re Bishop, 482 F.2d 381 (4th Cir. 1973).

Triggering of mobile goods provision. - The choice of law provision provided for cases involving mobile goods cannot be triggered by merely arguing that the goods in question are mobile. Ingersoll-Rand Fin. Corp. v. Nunley, 11 Bankr. 528 (W.D. Va. 1981).

Where horses' combined itineraries covered at least ten different states and at least five foreign countries it is appropriate to classify the horses as equipment that are mobile goods. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774 (Bankr. E.D. Va. 1987).

Former § 8.9-302 contemplated a Virginia certificate of title, not a foreign certificate, excluded by the provisions of former § 8.9-103. In re Smith, 311 F. Supp. 900 (W.D. Va. 1970), aff'd sub nom. Callaghan v. Commercial Credit Corp., 437 F.2d 898 (4th Cir. 1971).

West Virginia lien accorded primacy in favor of original creditor. - Where an automobile trailer was procured by a person in West Virginia where he was then resident, where, in payment of the purchase price, he executed a security agreement which was assigned to a creditor and endorsed as a lien upon the West Virginia certificate of title evidencing the person's ownership of the trailer, where the trailer was taken, about thirty days after its acquisition, into Virginia, the new permanent residence of the owner, and where the owner did not obtain a title certificate for it in Virginia, despite the fact that the lien was not shown upon a title certificate as provided by the law of Virginia, former §§ 46.1-41 and 46.1-69, in these peculiar circumstances, the State statutes would accord viability and primacy to the West Virginia lien in favor of the original creditor and not to the general creditors of the owner. Callaghan v. Commercial Credit Corp., 437 F.2d 898 (4th Cir. 1971).

Where collateral of a certain type has been brought into a state subject to a security interest which attached in another jurisdiction, this section provides that the law of the state where the collateral is located when the last event occurs on which is based the assertion that the security interest is perfected or unperfected shall apply. Ingersoll-Rand Fin. Corp. v. Nunley, 11 Bankr. 528 (W.D. Va. 1981).

West Virginia law of perfection held to apply. - In an appeal of an order by the bankruptcy court holding that plaintiff did not have a perfected lien on certain mining equipment, West Virginia law was held to apply where the collateral was located in West Virginia for the seven months prior to the trustee's filing in bankruptcy, where plaintiff asserted a bailment as one perfecting event and the collateral was located in West Virginia at the time of the asserted bailment, and where, under plaintiff's alternative theory that the equipment was "mobile," the last arguable act of perfection was plaintiff's filing in the debtor's chief place of business state, Virginia, at which time the collateral was located in Kentucky. Ingersoll-Rand Fin. Corp. v. Nunley, 11 Bankr. 528 (W.D. Va. 1981).

Reperfection of security interest in Virginia not precluded. - If the sellers had perfected their security interest in Kentucky and thereafter the collateral was removed to Virginia, and more than four months had passed after removal and filing with the State Corporation Commission, then the sellers were not precluded from reperfecting their security interest in Virginia. Phillips v. Ball & Hunt Enters., Inc., 933 F. Supp. 1290 (W.D. Va. 1996).

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. Former sections 9-103(1)(a) and (b), 9-103(3)(a) and (b), and 9-103(5), substantially modified.
2. Scope of this Subpart. Part 3, Subpart 1 (Sections 9-301 through 9-307) contains choice of law rules similar to those of former Section 9-103. Former Section 9-103 generally addresses which state's law governs "perfection and the effect of perfection or nonperfection of" security interests. See, e.g., former Section 9-103(1)(b). This Article follows the broader and more precise formulation in former Section 9-103(6)(b), which was revised in connection with the promulgation of Revised Article 8 in 1994: "Perfection, the effect of perfection or nonperfection, and the priority of" security interests. Priority, in this context, subsumes all of the rules in Part 3, including "cut off" or "take free" rules such as Sections 9-317(b), (c), and (d), 9-320(a), (b), and (d), and 9-332. This subpart does not address choice of law for other purposes. For example, the law applicable to issues such as attachment, validity, characterization (e.g., true lease or security interest), and enforcement is governed by the rules in Section 1-301 ; that governing law typically is specified in the same agreement that contains the security agreement. And, another jurisdiction's law may govern other third-party matters addressed in this article. See Section 9-401, Comment 3.
3. Scope of Referral. In designating the jurisdiction whose law governs, this article directs the court to apply only the substantive ("local") law of a particular jurisdiction and not its choice of law rules.

   Example 1: Litigation over the priority of a security interest in accounts arises in State X. State X has adopted the official text of this article, which provides that priority is determined by the local law of the jurisdiction in which the debtor is located. See section 9-301(1). The debtor is located in State Y. Even if State Y has retained former article 9 or enacted a nonuniform choice of law rule (e.g., one that provides that perfection is governed by the law of State Z), a State X court should look only to the substantive law of State Y and disregard State Y's choice of law rule. State Y's substantive law (e.g., its section 9-501) provides that financing statements should be filed in a filing office in State Y. Note, however, that if the identical perfection issue were to be litigated in State Y, the court would look to State Y's former section 9-103 or nonuniform section 9-301 and conclude that a filing in State Y is ineffective.

   Example 2: In the preceding example, assume that State X has adopted the official text of this article, and State Y has adopted a nonuniform section 9-301(1) under which perfection is governed by the whole law of State X, including its choice of law rules. If litigation occurs in State X, the court should look to the substantive law of State Y, which provides that financing statements are to be filed in a filing office in State Y. If litigation occurs in State Y, the court should look to the law of State X, whose choice of law rule requires that the court apply the substantive law of State Y. Thus, regardless of the jurisdiction in which the litigation arises, the financing statement should be filed in State Y.

4. Law Governing Perfection: General Rule. Paragraph (1) contains the general rule: The law governing perfection of security interests in both tangible and intangible collateral, whether perfected by filing or automatically, is the law of the jurisdiction of the debtor's location, as determined under section 9-307.

   Paragraph (1) substantially simplifies the choice of law rules. Former section 9-103 contained different choice of law rules for different types of collateral. Under section 9-301(1), the law of a single jurisdiction governs perfection with respect to most types of collateral, both tangible and intangible. Paragraph (1) eliminates the need for former section 9-103(1)(c), which concerned purchase-money security interests in tangible collateral that is intended to move from one jurisdiction to the other. It is likely to reduce the frequency of cases in which the governing law changes after a financing statement is properly filed. (Presumably, debtors change their own location less frequently than they change the location of their collateral.) The approach taken in paragraph (1) also eliminates some difficult priority issues and the need to distinguish between "mobile" and "ordinary" goods, and it reduces the number of filing offices in which secured parties must file or search when collateral is located in several jurisdictions.

5. Law Governing Perfection: Exceptions. The general rule is subject to several exceptions. It does not apply to goods covered by a certificate of title (see Section 9-303), deposit accounts (see Section 9-304), investment property (see Section 9-305), or letter-of-credit rights (see Section 9-306). Nor does it apply to possessory security interests, i.e., security interests that the secured party has perfected by taking possession of the collateral (see paragraph (2)), security interests perfected by filing a fixture filing (see subparagraph (3)(A)), security interests in timber to be cut (subparagraph (3)(B)), or security interests in as-extracted collateral (see subparagraph (4)).
   1. Possessory Security Interests. Paragraph (2) applies to possessory security interests and provides that perfection is governed by the local law of the jurisdiction in which the collateral is located. This is the rule of former section 9-103(1)(b), except paragraph (2) eliminates the troublesome "last event" test of former law.

      The distinction between nonpossessory and possessory security interests creates the potential for the same jurisdiction to apply two different choice of law rules to determine perfection in the same collateral. For example, were a secured party in possession of an instrument or a tangible document to relinquish possession in reliance on temporary perfection, the applicable law immediately would change from that of the location of the collateral to that of the location of the debtor. The applicability of two different choice of law rules for perfection is unlikely to lead to any material practical problems. The perfection rules of one article 9 jurisdiction are likely to be identical to those of another. Moreover, under paragraph (3), the relative priority of competing security interests in tangible collateral is resolved by reference to the law of the jurisdiction in which the collateral is located, regardless of how the security interests are perfected.

   2. Fixture Filings. Under the general rule in paragraph (1), a security interest in fixtures may be perfected by filing in the office specified by Section 9-501(a) as enacted in the jurisdiction in which the debtor is located. However, application of this rule to perfection of a security interest by filing a fixture filing could yield strange results. For example, perfection of a security interest in fixtures located in Arizona and owned by a Delaware corporation would be governed by the law of Delaware. Although Delaware law would send one to a filing office in Arizona for the place to file a financing statement as a fixture filing, see section 9-501, Delaware law would not take account of local, nonuniform, real property filing and recording requirements that Arizona law might impose. For this reason, paragraph (3)(A) contains a special rule for security interests perfected by a fixture filing; the law of the jurisdiction in which the fixtures are located governs perfection, including the formal requisites of a fixture filing. Under paragraph (3)(C), the same law governs priority. Fixtures are "goods" as defined in section 9-102.

      The filing of a financing statement to perfect a security interest in collateral of a transmitting utility constitutes a fixture filing with respect to goods that are or become fixtures. See Section 9-501(b). Accordingly, to perfect a security interest in goods of this kind by a fixture filing, a financing statement must be filed in the office specified by Section 9-501(b) as enacted in the jurisdiction in which the goods are located. If the fixtures collateral is located in more than one State, filing in all of those States will be necessary to perfect a security interest in all the fixtures collateral by a fixture filing. Of course, a security interest in nearly all types of collateral (including fixtures) of a transmitting utility may be perfected by filing in the office specified by Section 9-501(b) as enacted in the jurisdiction in which the transmitting utility is located. However, such a filing will not be effective as a fixture filing except with respect to goods that are located in that jurisdiction.

   3. Timber to Be Cut. Application of the general rule in paragraph (1) to perfection of a security interest in timber to be cut would yield undesirable results analogous to those described with respect to fixtures. Paragraph (3)(B) adopts a similar solution: Perfection is governed by the law of the jurisdiction in which the timber is located. As with fixtures, under paragraph (3)(C), the same law governs priority. Timber to be cut also is "goods" as defined in section 9-102.

      Paragraph (3)(B) applies only to "timber to be cut," not to timber that has been cut. Consequently, once the timber is cut, the general choice of law rule in paragraph (1) becomes applicable. To ensure continued perfection, a secured party should file in both the jurisdiction in which the timber to be cut is located and in the state where the debtor is located. The former filing would be with the office in which a real property mortgage would be filed, and the latter would be a central filing. See section 9-501.

   4. As-Extracted Collateral. Paragraph (4) adopts the rule of former section 9-103(5) with respect to certain security interests in minerals and related accounts. Like security interests in fixtures perfected by filing a fixture filing, security interests in minerals that are as-extracted collateral are perfected by filing in the office designated for the filing or recording of a mortgage on the real property. For the same reasons, the law governing perfection and priority is the law of the jurisdiction in which the wellhead or minehead is located.
6. Change in Law Governing Perfection. When the debtor changes its location to another jurisdiction, the jurisdiction whose law governs perfection under paragraph (1) changes, as well. Similarly, the law governing perfection of a possessory security interest in collateral under paragraph (2) changes when the collateral is removed to another jurisdiction. Nevertheless, these changes will not result in an immediate loss of perfection. See section 9-316(a) and (b).
7. Law Governing Effect of Perfection and Priority: Goods, Documents, Instruments, Money, Negotiable Documents, and Tangible Chattel Paper. Under former section 9-103, the law of a single jurisdiction governed both questions of perfection and those of priority. This article generally adopts that approach. See paragraph (1). But the approach may create problems if the debtor and collateral are located in different jurisdictions. For example, assume a security interest in equipment located in Pennsylvania is perfected by filing in Illinois, where the debtor is located. If the law of the jurisdiction in which the debtor is located were to govern priority, then the priority of an execution lien on goods located in Pennsylvania would be governed by rules enacted by the Illinois legislature.

   To address this problem, paragraph (3)(C) divorces questions of perfection from questions of "the effect of perfection or nonperfection and the priority of a security interest." Under paragraph (3)(C), the rights of competing claimants to tangible collateral are resolved by reference to the law of the jurisdiction in which the collateral is located. A similar bifurcation applied to security interests in investment property under former section 9-103(6). See section 9-305.

   Paragraph (3)(C) applies the law of the situs to determine priority only with respect to goods (including fixtures), instruments, money, tangible negotiable documents, and tangible chattel paper. Compare former section 9-103(1), which applied the law of the location of the collateral to documents, instruments, and "ordinary" (as opposed to "mobile") goods. This article does not distinguish among types of goods. The ordinary obile goods distinction appears to address concerns about where to file and search, rather than concerns about priority. There is no reason to preserve this distinction under the bifurcated approach.

   Particularly serious confusion may arise when the choice of law rules of a given jurisdiction result in each of two competing security interests in the same collateral being governed by a different priority rule. The potential for this confusion existed under former section 9-103(4) with respect to chattel paper: Perfection by possession was governed by the law of the location of the paper, whereas perfection by filing was governed by the law of the location of the debtor. Consider the mess that would have been created if the language or interpretation of former section 9-308 were to differ in the two relevant states, or if one of the relevant jurisdictions (e.g., a foreign country) had not adopted article 9. The potential for confusion could have been exacerbated when a secured party perfected both by taking possession in the state where the collateral is located (State A) and by filing in the state where the debtor is located (State B) - a common practice for some chattel paper financers. By providing that the law of the jurisdiction in which the collateral is located governs priority, paragraph (3) substantially diminishes this problem.

8. Non-U.S. Debtors. This article applies the same choice of law rules to all debtors, foreign and domestic. For example, it adopts the bifurcated approach for determining the law applicable to security interests in goods and other tangible collateral. See comment 5(a), above. The article contains a new rule specifying the location of non-U.S. debtors for purposes of this part. The rule appears in section 9-307 and is explained in the Reporters' Comments following that section. Former section 9-103(3)(c), which contained a special choice of law rule governing security interests created by debtors located in a non-U.S. jurisdiction, proved unsatisfactory and was deleted.

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. New.
2. Agricultural Liens. This section provides choice of law rules for agricultural liens on farm products. Perfection, the effect of perfection or nonperfection, and priority all are governed by the law of the jurisdiction in which the farm products are located. Other choice of law rules, including Section 1-301 , determine which jurisdiction's law governs other matters, such as the secured party's rights on default. See Section 9-301, Comment 2. Inasmuch as no agricultural lien on proceeds arises under this Article, this section does not expressly apply to proceeds of agricultural liens. However, if another statute creates an agricultural lien on proceeds, it may be appropriate for courts to apply the choice of law rule in this section to determine priority in the proceeds.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-103(2)(a) and (b), substantially revised.

2. Scope of This Section. This section applies to "goods covered by a certificate of title." The new definition of "certificate of title" in section 9-102 makes clear that this section applies not only to certificate-of-title statutes under which perfection occurs upon notation of the security interest on the certificate but also to those that contemplate notation but provide that perfection is achieved by another method, e.g., delivery of designated documents to an official. Subsection (a), which is new, makes clear that this section applies to certificates of a jurisdiction having no other contacts with the goods or the debtor. This result comports with most of the reported cases on the subject and with contemporary business practices in the trucking industry.

3. Law Governing Perfection and Priority. Subsection (c) is the basic choice of law rule for goods covered by a certificate of title. Perfection and priority of a security interest are governed by the law of the jurisdiction under whose certificate of title the goods are covered from the time the goods become covered by the certificate of title until the goods cease to be covered by the certificate of title.

Normally, under the law of the relevant jurisdiction, the perfection step would consist of compliance with that jurisdiction's certificate-of-title statute and a resulting notation of the security interest on the certificate of title. See section 9-311(b). In the typical case of an automobile or over-the-road truck, a person who wishes to take a security interest in the vehicle can ascertain whether it is subject to any security interests by looking at the certificate of title. But certificates of title cover certain types of goods in some states but not in others. A secured party who does not realize this may extend credit and attempt to perfect by filing in the jurisdiction in which the debtor is located. If the goods had been titled in another jurisdiction, the lender would be unperfected.

Subsection (b) explains when goods become covered by a certificate of title and when they cease to be covered. Goods may become covered by a certificate of title, even though no certificate of title has issued. Former section 9-103(2)(b) provided that the law of the jurisdiction issuing the certificate ceases to apply upon "surrender" of the certificate. This article eliminates the concept of "surrender." However, if the certificate is surrendered in conjunction with an appropriate application for a certificate to be issued by another jurisdiction, the law of the original jurisdiction ceases to apply because the goods became covered subsequently by a certificate of title from another jurisdiction. Alternatively, the law of the original jurisdiction ceases to apply when the certificate "ceases to be effective" under the law of that jurisdiction. Given the diversity in certificate-of-title statutes, the term "effective" is not defined.

4. Continued Perfection. The fact that the law of one state ceases to apply under subsection (b) does not mean that a security interest perfected under that law becomes unperfected automatically. In most cases, the security interest will remain perfected. See section 9-316(d) and (e). Moreover, a perfected security interest may be subject to defeat by certain buyers and secured parties. See section 9-337.

5. Inventory. Compliance with a certificate-of-title statute generally is not the method of perfecting security interests in inventory. Section 9-311(d) provides that a security interest created in inventory held by a person in the business of selling goods of that kind is subject to the normal filing rules; compliance with a certificate-of-title statute is not necessary or effective to perfect the security interest. Most certificate-of-title statutes are in accord.

The following example explains the subtle relationship between this rule and the choice of law rules in section 9-303 and former section 9-103(2):

Example: Goods are located in State A and covered by a certificate of title issued under the law of State A. The State A certificate of title is "clean"; it does not reflect a security interest. Owner takes the goods to State B and sells (trades in) the goods to Dealer, who is in the business of sellig goods of that kind and is located (within the meaning of section 9-307) in State B. As is customary, Dealer retains the duly assigned State A certificate of title pending resale of the goods. Dealer's inventory financer, SP, obtains a security interest in the goods under its after-acquired property clause.

Under section 9-311(d) of both State A and State B, Dealer's inventory financer, SP, must perfect by filing instead of complying with a certificate-of-title statute. If section 9-303 were read to provide that the law applicable to perfection of SP's security interest is that of State A, because the goods are covered by a State A certificate, then SP would be required to file in State A under State A's section 9-501. That result would be anomalous, to say the least, since the principle underlying section 9-311(d) is that the inventory should be treated as ordinary goods.

Section 9-303 (and former section 9-103(2)) should be read as providing that the law of State B, not State A, applies. A court looking to the forum's section 9-303(a) would find that section 9-303 applies only if two conditions are met: (i) The goods are covered by the certificate as explained in section 9-303(b), i.e., application had been made for a State (here, State A) to issue a certificate of title covering the goods and (ii) the certificate is a "certificate of title" as defined in section 9-102, i.e., "a statute provides for the security interest in question to be indicated on the certificate as a condition or result of the security interest's obtaining priority over the rights of a lien creditor." Stated otherwise, section 9-303 applies only when compliance with a certificate-of-title statute, and not filing, is the appropriate method of perfection. Under the law of State A, for purposes of perfecting SP's security interest in the dealer's inventory , the proper method of perfection is filing - not compliance with State A's certificate-of-title statute. For that reason, the goods are not covered by a "certificate of title," and the second condition is not met. Thus, section 9-303 does not apply to the goods. Instead, section 9-301 applies, and the applicable law is that of State B, where the debtor (dealer) is located.

6. External Constraints on This Section. The need to coordinate article 9 with a variety of nonuniform certificate-of-title statutes, the need to provide rules to take account of situations in which multiple certificates of title are outstanding with respect to particular goods, and the need to govern the transition from perfection by filing in one jurisdiction to perfection by notation in another all create pressure for a detailed and complex set of rules. In an effort to minimize complexity, this article does not attempt to coordinate article 9 with the entire array of certificate-of-title statutes. In particular, sections 9-303, 9-311, and 9-316(d) and (e) assume that the certificate-of-title statutes to which they apply do not have relation-back provisions (i.e., provisions under which perfection is deemed to occur at a time earlier than when the perfection steps actually are taken). A legislative note to section 9-311 recommends the elimination of relation-back provisions in certificate-of-title statutes affecting perfection of security interests.

Ideally, at any given time, only one certificate of title is outstanding with respect to particular goods. In fact, however, sometimes more than one jurisdiction issues more than one certificate of title with respect to the same goods. This situation results from defects in certificate-of-title laws and the interstate coordination of those laws, not from deficiencies in this article. As long as the possibility of multiple certificates of title remains, the potential for innocent parties to suffer losses will continue. At best, this article can identify clearly which innocent parties will bear the losses in familiar fact patterns.

OFFICIAL COMMENT

Comment. - 1. Source. New; derived from section 8-110(e) and former section 9-103(6).

2. Deposit Accounts. Under this section, the law of the "bank's jurisdiction" governs perfection and priority of a security interest in deposit accounts. Subsection (b) contains rules for determining the "bank's jurisdiction." The substance of these rules is substantially similar to that of the rules determining the "security intermediary's jurisdiction" under former section 8-110(e), except that subsection (b)(1) provides more flexibility than the analogous provision in former section 8-110(e)(1). Subsection (b)(1) permits the parties to choose the law of one jurisdiction to govern perfection and priority of security interests and a different governing law for other purposes. The parties' choice is effective, even if the jurisdiction whose law is chosen bears no relationship to the parties or the transaction. Section 8-110(e)(1) has been conformed to subsection (b)(1) of this section, and section 9-305(b)(1), concerning a commodity intermediary's jurisdiction, makes a similar departure from former section 9-103(6)(e)(i).

3. Change in Law Governing Perfection. When the bank's jurisdiction changes, the jurisdiction whose law governs perfection under subsection (a) changes, as well. Nevertheless, the change will not result in an immediate loss of perfection. See section 9-316(f) and (g).

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. Former section 9-103(6).
2. Investment Property: General Rules. This section specifies choice of law rules for perfection and priority of security interests in investment property. Subsection (a)(1) covers security interests in certificated securities. Subsection (a)(2) covers security interests in uncertificated securities. Subsection (a)(3) covers security interests in security entitlements and securities accounts. Subsection (a)(4) covers security interests in commodity contracts and commodity accounts. The approach of each of these paragraphs is essentially the same. They identify the jurisdiction's law that governs questions of perfection and priority by using the same principles that article 8 uses to determine other questions concerning that form of investment property. Thus, for certificated securities, the law of the jurisdiction in which the certificate is located governs. Cf. section 8-110(c). For uncertificated securities, the law of the issuer's jurisdiction governs. Cf. section 8-110(a). For security entitlements and securities accounts, the law of the securities intermediary's jurisdiction governs. Cf. section 8-110(b). For commodity contracts and commodity accounts, the law of the commodity intermediary's jurisdiction governs. Because commodity contracts and commodity accounts are not governed by article 8, subsection (b) contains rules that specify the commodity intermediary's jurisdiction. These are analogous to the rules in section 8-110(e) specifying a securities intermediary's jurisdiction. Subsection (b)(1) affords the parties greater flexibility than did former section 9-103(6)(3). See also section 9-304(b) (bank's jurisdiction) and revised section 8-110(e)(1) (securities intermediary's jurisdiction).
3. Investment Property: Exceptions. Subsection (c) establishes an exception to the general rules set out in subsection (a). It provides that perfection of a security interest by filing, automatic perfection of a security interest in investment property created by a debtor who is a broker or securities intermediary (see section 9-309(10)), and automatic perfection of a security interest in a commodity contract or commodity account of a debtor who is a commodity intermediary (see section 9-309(11)) are governed by the law of the jurisdiction in which the debtor is located, as determined under section 9-307.
4. Examples: The following examples illustrate the rules in this section:

   Example 1: A customer residing in New Jersey maintains a securities account with Able & Co. The agreement between the customer and Able specifies that it is governed by Pennsylvania law but expressly provides that the law of California is Able's jurisdiction for purposes of the Uniform Commercial Code. Through the account the customer holds securities of a Massachusetts corporation, which Able holds through a clearing corporation located in New York. The customer obtains a margin loan from Able. Subsection (a)(3) provides that California law - the law of the securities intermediary's jurisdiction - governs perfection and priority of the security interest, even if California has no other relationship to the parties or the transaction.

   Example 2: A customer residing in New Jersey maintains a securities account with Able & Co. The agreement between the customer and Able specifies that it is governed by Pennsylvania law. Through the account the customer holds securities of a Massachusetts corporation, which Able holds through a clearing corporation located in New York. The customer obtains a loan from a lender located in Illinois. The lender takes a security interest and perfects by obtaining an agreement among the debtor, itself, and Able, which satisfies the requirement of section 8-106(d)(2) to give the lender control. Subsection (a)(3) provides that Pennsylvania law-the law of the securities intermediary's jurisdiction-governs perfection and priority of the security interest, even if Pennsylvania has no other relationship to the parties or the transaction.

   Example 3: A customer residing in New Jersey maintains a securities account with Able & Co. The agreement between the customer and Able specifies that it is governed by Pennsylvania law. Through the account, the customer holds securities of a Massachusetts corporation, which Able holds through a clearing corporation located in New York. The customer borrows from SP-1, and SP-1 files a financing statement in New Jersey. Later, the customer obtains a loan from SP-2. SP-2 takes a security interest and perfects by obtaining an agreement among the debtor, itself, and Able, which satisfies the requirement of section 8-106(d)(2) to give the SP-2 control. Subsection (c) provides that perfection of SP-1's security interest by filing is governed by the location of the debtor, so the filing in New Jersey was appropriate. Subsection (a)(3), however, provides that Pennsylvania law-the law of the securities intermediary's jurisdiction-governs all other questions of perfection and priority. Thus, Pennsylvania law governs perfection of SP-2's security interest, and Pennsylvania law also governs the priority of the security interests of SP-1 and SP-2.

5. Change in Law Governing Perfection. When the issuer's jurisdiction, the securities intermediary's jurisdiction, or commodity intermediary's jurisdiction changes, the jurisdiction whose law governs perfection under subsection (a) changes, as well. Similarly, the law governing perfection of a possessory security interest in a certificated security changes when the collateral is removed to another jurisdiction, see subsection (a)(1), and the law governing perfection by filing changes when the debtor changes its location. See subsection (c). Nevertheless, these changes will not result in an immediate loss of perfection. See Section 9-316(f), (g).

OFFICIAL COMMENT

Comment. - 1. Source. New; derived in part from section 8-110(e) and former section 9-103(6).

2. Sui Generis Treatment. This section governs the applicable law for perfection and priority of security interests in letter-of-credit rights, other than a security interest perfected only under section 9-308(d) (i.e., as a supporting obligation). The treatment differs substantially from that provided in section 9-304 for deposit accounts. The basic rule is that the law of the issuer's or nominated person's (e.g., confirmer's) jurisdiction, derived from the terms of the letter of credit itself, controls perfection and priority, but only if the issuer's or nominated person's jurisdiction is a state, as defined in section 9-102. If the issuer's or nominated person's jurisdiction is not a state, the baseline rule of section 9-301 applies - perfection and priority are governed by the law of the debtor's location, determined under section 9-307. Export transactions typically involve a foreign issuer and a domestic nominated person, such as a confirmer, located in a state. The principal goal of this section is to reduce the likelihood that perfection and priority would be governed by the law of a foreign jurisdiction in a transaction that is essentially domestic from the standpoint of the debtor-beneficiary, its creditors, and a domestic nominated person.

3. Issuer's or Nominated Person's Jurisdiction. Subsection (b) defers to the rules established under section 5-116 for determination of an issuer's or nominated person's jurisdiction.

Example: An Italian bank issues a letter of credit that is confirmed by a New York bank. The beneficiary is a Connecticut corporation. The letter of credit provides that the issuer's liability is governed by Italian law, and the confirmation provides that the confirmer's liability is governed by the law of New York. Under sections 5-116(a) and 9-306(b), Italy is the issuer's jurisdiction and New York is the confirmer's (nominated person's) jurisdiction. Because the confirmer's jurisdiction is a state, the law of New York governs perfection and priority of a security interest in the beneficiary's letter-of-credit right against the confirmer. See section 9-306(a). However, because the issuer's jurisdiction is not a state, the law of that jurisdiction does not govern. See section 9-306(a). Rather, the choice-of-law rule in section 9-301(1) applies to perfection and priority of a security interest in the beneficiary's letter-of-credit right against the issuer. Under that section, perfection and priority are governed by the law of the jurisdiction in which the debtor (beneficiary) is located. That jurisdiction is Connecticut. See section 9-307.

4. Scope of this section. This section specifies only the law governing perfection, the effect of perfection or nonperfection, and priority of security interests. Section 5-116 specifies the law governing the liability of, and article 5 (or other applicable law) deals with the rights and duties of, an issuer or nominated person. Perfection, nonperfection, and priority have no effect on those rights and duties.

5. Change in Law Governing Perfection. When the issuer's jurisdiction, or nominated person's jurisdiction changes, the jurisdiction whose law governs perfection under subsection (a) changes, as well. Nevertheless, this change will not result in an immediate loss of perfection. See section 9-316(f) and (g).

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. Former section 9-103(3)(d), substantially revised.
2. General Rules. As a general matter, the location of the debtor determines the jurisdiction whose law governs perfection of a security interest. See sections 9-301(1) and 9-305(c). It also governs priority of a security interest in certain types of intangible collateral, such as accounts, electronic chattel paper, and general intangibles. This section determines the location of the debtor for choice of law purposes, but not for other purposes. See subsection (k).

   Subsection (b) states the general rules: An individual debtor is deemed to be located at the individual's principal residence with respect to both personal and business assets. Any other debtor is deemed to be located at its place of business if it has only one, or at its chief executive office if it has more than one place of business.

   As used in this section, a "place of business" means a place where the debtor conducts its affairs. See subsection (a). Thus, every organization, even eleemosynary institutions and other organizations that do not conduct "for profit" business activities, has a "place of business." Under subsection (d), a person who ceases to exist, have a residence, or have a place of business continues to be located in the jurisdiction determined by subsection (b).

   The term "chief executive office" is not defined in this section or elsewhere in the Uniform Commercial Code. "Chief executive office" means the place from which the debtor manages the main part of its business operations or other affairs. This is the place where persons dealing with the debtor would normally look for credit information, and is the appropriate place for filing. With respect to most multistate debtors, it will be simple to determine which of the debtor's offices is the "chief executive office." Even when a doubt arises, it would be rare that there could be more than two possibilities. A secured party in such a case may protect itself by perfecting under the law of each possible jurisdiction.

   Similarly, the term "principal residence" is not defined. If the security interest in question is a purchase-money security interest in consumer goods which is perfected upon attachment, see section 9-309(1), the choice of law may make no difference. In other cases, when a doubt arises, prudence may dictate perfecting under the law of each jurisdiction that might be the debtor's "principal residence."

   Questions sometimes arise about the location of the debtor with respect to collateral held in a common-law trust. A typical common-law trust is not itself a juridical entity capable of owning property and so would not be a "debtor" as defined in Section 9-102. Rather, the debtor with respect to property held in a common-law trust typically is the trustee of the trust acting in the capacity of trustee. (The beneficiary would be a "debtor" with respect to its beneficial interest in the trust, but not with respect to the property held in the trust.) If a common-law trust has multiple trustees located in different jurisdictions, a secured party who perfects by filing would be well advised to file a financing statement in each jurisdiction in which a trustee is located, as determined under Section 9-307. Filing in all relevant jurisdictions would insure perfection and minimize any priority complications that otherwise might arise.

   The general rules are subject to several exceptions, each of which is discussed below.

3. Non-U.S. Debtors. Under the general rules of this section, a non-U.S. debtor normally would be located in a foreign jurisdiction and, as a consequence, foreign law would govern perfection. When foreign law affords no public notice of security interests, the general rule yields unacceptable results.

   Accordingly, subsection (c) provides that the normal rules for determining the location of a debtor (i.e., the rules in subsection (b)) apply only if they yield a location that is "a jurisdiction whose law generally requires information concerning the existence of a nonpossessory security interest to be made generally available in a filing, recording, or registration system as a condition or result of the security interest's obtaining priority over the rights of a lien creditor with respect to the collateral." The phrase "generally requires" is meant to include legal regimes that generally require notice in a filing or recording system as a condition of perfecting nonpossessory security interests, but which permit perfection by another method (e.g., control, automatic perfection, temporary perfection) in limited circumstances. A jurisdiction that has adopted this article or an earlier version of this article is such a jurisdiction. If the rules in subsection (b) yield a jurisdiction whose law does not generally require notice in a filing or registration system and none of the special rules in subsections (e), (f), (i), and (j) applies, the debtor is located in the District of Columbia.

   Example 1: Debtor is an English corporation with 7 offices in the United States and its chief executive office in London, England. Debtor creates a security interest in its accounts. Under subsection (b)(3), Debtor would be located in England. However, subsection (c) provides that subsection (b) applies only if English law generally conditions perfection on giving public notice in a filing, recording, or registration system. Otherwise, Debtor is located in the District of Columbia. Under section 9-301(1), perfection, the effect of perfection, and priority are governed by the law of the jurisdiction of the debtor's location - here, England or the District of Columbia (depending on the content of English law).

   Example 2: Debtor is an English corporation with 7 offices in the United States and its chief executive office in London, England. Debtor creates a security interest in equipment located in London. Under subsection (b)(3) Debtor would be located in England. However, subsection (c) provides that subsection (b) applies only if English law generally conditions perfection on giving public notice in a filing, recording, or registration system. Otherwise, Debtor is located in the District of Columbia. Under section 9-301(1), perfection is governed by the law of the jurisdiction of the debtor's location, whereas, under section 9-301(3), the law of the jurisdiction in which the collateral is located - here, England - governs priority.

   The foregoing discussion assumes that each transaction bears an appropriate relation to the forum state. In the absence of an appropriate relation, the forum state's entire UCC, including the choice of law provisions in article 9 (sections 9-301 through 9-307), will not apply. See section 9-109, comment 9.

4. Registered Organizations Organized Under Law of a State. Under subsection (e), a "registered organization" (defined in Section 9-102 so as to ordinarily include corporations, limited partnerships, limited liability companies, and statutory trusts) organized under the law of a "State" (defined in Section 9-102) is located in its state of organization. The term "registered organization" includes a business trust described in the second sentence of the term's definition. See Section 9-102. The trust's public organic record, typically the trust agreement, usually will indicate the jurisdiction under whose law the trust is organized.

   Subsection (g) makes clear that events affecting the status of a registered organization, such as the dissolution of a corporation or revocation of its charter, do not affect its location for purposes of subsection (e). However, certain of these events may result in, or be accompanied by, a transfer of collateral from the registered organization to another debtor. This section does not determine whether a transfer occurs, nor does it determine the legal consequences of any transfer.

   Determining the registered organization-debtor's location by reference to the jurisdiction of organization could provide some important side benefits for the filing systems. A jurisdiction could structure its filing system so that it would be impossible to make a mistake in a registered organization-debtor's name on a financing statement. For example, a filer would be informed if a filed record designated an incorrect corporate name for the debtor. Linking filing to the jurisdiction of organization also could reduce pressure on the system imposed by transactions in which registered organizations cease to exist - as a consequence of merger or consolidation, for example. The jurisdiction of organization might prohibit such transactions unless steps were taken to ensure that existing filings were refiled against a successor or terminated by the secured party.

5. Registered Organizations Organized Under Law of United States; Branches and Agencies of Banks Not Organized Under Law of United States.  Subsection (f) specifies the location of a debtor that is a registered organization organized under the law of the United States. It defers to law of the United States, to the extent that that law determines, or authorizes the debtor to determine, the debtor's location. Thus, if the law of the United States designates a particular state as the debtor's location, that state is the debtor's location for purposes of this article's choice-of-law rules. Similarly, if the law of the United States authorizes the registered organization to designate its state of location, the state that the registered organization designates is the state in which it is located for purposes of this article's choice-of-law rules. In other cases, the debtor is located in the District of Columbia.

   In some cases, the law of the United States authorizes the registered organization to designate a main office, home office, or other comparable office. See, e.g., 12 U.S.C. Sections 22 and 1464(a); 12 C.F.R. Section 552.3. Designation of such an office constitutes the designation of the State of location for purposes of Section 9-307 (f)(2).

   Subsection (f) also specifies the location of a branch or agency in the United States of a foreign bank that has one or more branches or agencies in the United States. The law of the United States authorizes a foreign bank (or, on behalf of the bank, a federal agency) to designate a single home state for all of the foreign bank's branches and agencies in the United States. See 12 U.S.C. Section 3103(c) and 12 C.F.R. Section 211.22. As authorized, the designation constitutes the State of location for the branch or agency for purposes of Section 9- 307(f), unless all of a foreign bank's branches or agencies that are in the United States are licensed in only one State, in which case the branches and agencies are located in that State. See subsection (i).

   In cases not governed by subsection (f) or (i), the location of a foreign bank is determined by subsections (b) and (c).

6. United States. To the extent that article 9 governs (see Sections 1-301 , 9-109(c)), the United States is located in the District of Columbia for purposes of this article's choice of law rules. See subsection (h).
7. Foreign Air Carriers. Subsection (j) follows former section 9-103(3)(d). To the extent that it is applicable, the Convention on the International Recognition of Rights in Aircraft (Geneva Convention) supersedes state legislation on this subject, as set forth in section 9-311(b), but some nations are not parties to that convention.

SubPart 2. Perfection.

CASE NOTES

Perfection turns on filing of financing statement. - Perfection of a security interest under the Virginia Commercial Code turns on whether a financing statement, if required, has been filed. Virginia Nat'l Bank v. Yale Mining Corp., 39 Bankr. 201 (Bankr. W.D. Va. 1984) (decided under prior law).

Perfection of conditional sales lien under former § 55-88 and effect under Bankruptcy Act. - See In re Markham, 254 F. Supp. 948 (W.D. Va. 1966) (decided under prior law).

Supplies had not become fixtures. - Electrical supplies to be installed in a school under construction had not become fixtures, as defined by former § 8.9-313 (1) (a), at the time the electrical contractor's creditor bank sought to take possession thereof, and thus the creditor need not have filed its financing statement as a fixture filing under former § 8.9-401 (1) (b). Where the bank made a proper filing under former § 8.9-401 (1) (c), the bank thus acquired a perfected security interest in the electrical supplies. Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844 , 263 S.E.2d 408 (1980) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 9-115(2) and 9-303.

2. General Rule. This article uses the term "attach" to describe the point at which property becomes subject to a security interest. The requisites for attachment are stated in section 9-203. When it attaches, a security interest may be either perfected or unperfected. "Perfected" means that the security interest has attached and the secured party has taken all the steps required by this article as specified in sections 9-310 through 9-316. A perfected security interest may still be or become subordinate to other interests. See, e.g., sections 9-320 and 9-322. However, in general, after perfection the secured party is protected against creditors and transferees of the debtor and, in particular, against any representative of creditors in insolvency proceedings instituted by or against the debtor. See, e.g., section 9-317.

Subsection (a) explains that the time of perfection is when the security interest has attached and any necessary steps for perfection, such as taking possession or filing, have been taken. The "except" clause refers to the perfection-upon-attachment rules appearing in section 9-309. It also reflects that other subsections of this section, e.g., subsection (d), contain automatic perfection rules. If the steps for perfection have been taken in advance, as when the secured party files a financing statement before giving value or before the debtor acquires rights in the collateral, then the security interest is perfected when it attaches.

3. Agricultural Liens. Subsection (b) is new. It describes the elements of perfection of an agricultural lien.

4. Continuous Perfection. The following example illustrates the operation of subsection (c):

Example 1: Debtor, an importer, creates a security interest in goods that it imports and the documents of title that cover the goods. The secured party, Bank, takes possession of a tangible negotiable bill of lading covering certain imported goods and thereby perfects its security interest in the bill of lading and the goods. See sections 9-312(c)(1) and 9-313(a). Bank releases the bill of lading to the debtor for the purpose of procuring the goods from the carrier and selling them. Under section 9-312(f), Bank continues to have a perfected security interest in the document and goods for 20 days. Bank files a financing statement covering the collateral before the expiration of the 20-day period. Its security interest now continues perfected for as long as the filing is good.

If the successive stages of Bank's security interest succeed each other without an intervening gap, the security interest is "perfected continuously," and the date of perfection is when the security interest first became perfected (i.e., when Bank received possession of the tangible bill of lading). If, however, there is a gap between stages - for example, if Bank does not file until after the expiration of the 20-day period specified in section 9-312(f) and leaves the collateral in the debtor's possession - then, the chain being broken, the perfection is no longer continuous. The date of perfection would now be the date of filing (after expiration of the 20-day period). Bank's security interest would be vulnerable to any interests arising during the gap period which under section 9-317 take priority over an unperfected security interest.

5. Supporting Obligations. Subsection (d) is new. It provides for automatic perfection of a security interest in a supporting obligation for collateral if the security interest in the collateral is perfected. This is unlikely to effect any change in the law prior to adoption of this article.

Example 2: Buyer is obligated to pay Debtor for goods sold. Buyer's president guarantees the obligation. Debtor creates a security interest in the right to payment (account) in favor of Lender. Under section 9-203(f), the security interest attaches to Debtor's rights under the guarantee (supporting obligation). Under subsection (d), perfection of the security interest in the account constitutes perfection of the security interest in Debtor's rights under the guarantee.

6. Rights to Payment Secured by Lien. Subsection (e) is new. It deals with the situation in which a security interest is created in a right to payment that is secured by a security interest, mortgage, or other lien.

Example 3: Owner gives to Mortgagee a mortgage on Blackacre to secure a loan. Owner's obligation to pay is evidenced by a promissory note. In need of working capital, Mortgagee borrows from Financer and creates a security interest in the note in favor of Financer. Section 9-203(g) adopts the traditional view that the mortgage follows the note; i.e., the transferee of the note acquires the mortgage, as well. This subsection adopts a similar principle: Perfection of a security interest in the right to payment constitutes perfection of a security interest in the mortgage securing it.

An important consequence of the rules in section 9-203(g) and subsection (e) is that, by acquiring a perfected security interest in a mortgage (or other secured) note, the secured party acquires a security interest in the mortgage (or other lien) that is senior to the rights of a person who becomes a lien creditor of the mortgagee (article 9 debtor). See section 9-317(a)(2). This result helps prevent the separation of the mortgage (or other lien) from the note.

Under this article, attachment and perfection of a security interest in a secured right to payment do not of themselves affect the obligation to pay. For example, if the obligation is evidenced by a negotiable note, then article 3 dictates the person whom the maker must pay to discharge the note and any lien securing it. See section 3-602. If the right to payment is a payment intangible, then section 9-406 determines whom the account debtor must pay.

Similarly, this article does not determine who has the power to release a mortgage of record. That issue is determined by real property law.

7. Investment Property. Subsections (f) and (g) follow former section 9-115(2).

OFFICIAL COMMENT

Comment. - 1. Source. Derived from former sections 9-115(4)(c) and (d), 9-116, and 9-302(1).

2. Automatic Perfection. This section contains the perfection-upon-attachment rules previously located in former sections 9-115(4)(c) and (d), 9-116, and 9-302(1). Rather than continue to state the rule by indirection, this section explicitly provides for perfection upon attachment.

3. Purchase-Money Security Interest in Consumer Goods. Former section 9-302(1)(d) has been revised and appears here as paragraph (1). No filing or other step is required to perfect a purchase-money security interest in consumer goods, other than goods, such as automobiles, that are subject to a statute or treaty described in section 9-311(a). However, filing is required to perfect a non-purchase-money security interest in consumer goods and is necessary to prevent a buyer of consumer goods from taking free of a security interest under section 9-320(b). A fixture filing is required for priority over conflicting interests in fixtures to the extent provided in section 9-334.

4. Rights to Payment. Paragraph (2) expands upon former section 9-302(1)(e) by affording automatic perfection to certain assignments of payment intangibles as well as accounts. The purpose of paragraph (2) is to save from ex post facto invalidation casual or isolated assignments - assignments which no one would think of filing. Any person who regularly takes assignments of any debtor's accounts or payment intangibles should file. In this connection section 9-109(d)(4) through (7), which excludes certain transfers of accounts, chattel paper, payment intangibles, and promissory notes from this article, should be consulted.

Paragraphs (3) and (4), which are new, afford automatic perfection to sales of payment intangibles and promissory notes, respectively. They reflect the practice under former article 9. Under that article, filing a financing statement did not affect the rights of a buyer of payment intangibles or promissory notes, inasmuch as the former article did not cover those sales. To the extent that the exception in paragraph (2) covers outright sales of payment intangibles, which automatically are perfected under paragraph (3), the exception is redundant.

5. Health-Care-Insurance Receivables. Paragraph (5) extends automatic perfection to assignments of health-care-insurance receivables if the assignment is made to the health-care provider that provided the health-care goods or services. The primary effect is that, when an individual assigns a right to payment under an insurance policy to the person who provided health-care goods or services, the provider has no need to file a financing statement against the individual. The normal filing requirements apply to other assignments of health-care-insurance receivables covered by this article, e.g., assignments from the health-care provider to a financer.

6. Investment Property. Paragraph (9) replaces the last clause of former section 9-116(2), concerning security interests that arise in the delivery of a financial asset.

Paragraphs (10) and (11) replace former section 9-115(4)(c) and (d), concerning secured financing of securities and commodity firms and clearing corporations. The former sections indicated that, with respect to certain security interests created by a securities intermediary or commodity intermediary, "(t)he filing of a financing statement . . . has no effect for purposes of perfection or priority with respect to that security interest." No change in meaning is intended by the deletion of the quoted phrase.

Secured financing arrangements for securities firms are currently implemented in various ways. In some circumstances, lenders may require that the transactions be structured as "hard pledges," where the securities are transferred on the books of a clearing corporation from the debtor's account to the lender's account or to a special pledge account for the lender where they cannot be disposed of without the specific consent of the lender. In other circumstances, lenders are content with so-called "agreement to pledge" or "agreement to deliver" arrangements, where the debtor retains the positions in its own account, but reflects on its books that the positions have been hypothecated and promises that the securities will be transferred to the secured party's account on demand.

The perfection and priority rules of this article are designed to facilitate current secured financing arrangements for securities firms as well as to provide sufficient flexibility to accommodate new arrangements that develop in the future. Hard pledge arrangements are covered by the concept of control. See sections 8-106, 9-106, and 9-314. Noncontrol secured financing arrangements for securities firms are covered by the automatic perfection rule of paragraph (10). Before the 1994 revision of articles 8 and 9, agreement to pledge arrangements could be implemented under a provision that a security interest in securities given for new value under a written security agreement was perfected without filing or possession for a period of 21 days. Although the security interests were temporary in legal theory, the financing arrangements could, in practice, be continued indefinitely by rolling over the loans at least every 21 days. Accordingly, a knowledgeable creditor of a securities firm realizes that the firm's securities may be subject to security interests that are not discoverable from any public records. The automatic-perfection rule of paragraph (10) makes it unnecessary to engage in the purely formal practice of rolling over these arrangements every 21 days.

In some circumstances, a clearing corporation may be the debtor in a secured financing arrangement. For example, a clearing corporation that settles delivery-versus-payment transactions among its participants on a net, same-day basis relies on timely payments from all participants with net obligations due to the system. If a participant that is a net debtor were to default on its payment obligation, the clearing corporation would not receive some of the funds needed to settle with participants that are net creditors to the system. To complete end-of-day settlement after a payment default by a participant, a clearing corporation that settles on a net, same-day basis may need to draw on credit lines and pledge securities of the defaulting participant or other securities pledged by participants in the clearing corporation to secure such drawings. The clearing corporation may be the top-tier securities intermediary for the securities pledged, so that it would not be practical for the lender to obtain control. Even where the clearing corporation holds some types of securities through other intermediaries, however, the clearing corporation is unlikely to be able to complete the arrangements necessary to convey "control" over the securities to be pledged in time to complete settlement in a timely manner. However, the term "securities intermediary" is defined in section 8-102(a)(14) to include clearing corporations. Thus, the perfection rule of paragraph (10) applies to security interests in investment property granted by clearing corporations.

7. Beneficial Interests in Trusts. Under former section 9-302(1)(c), filing was not required to perfect a security interest created by an assignment of a beneficial interest in a trust. Because beneficial interests in trusts are now used as collateral with greater frequency in commercial transactions, under this article filing is required to perfect a security interest in a beneficial interest.

8. Assignments for Benefit of Creditors. No filing or other action is required to perfect an assignment for the benefit of creditors. These assignments are not financing transactions, and the debtor ordinarily will not be engaging in further credit transactions.

CASE NOTES

Perfection turns on filing of financing statement. - Perfection of a security interest under the Virginia Commercial Code turns on whether a financing statement, if required, has been filed. Virginia Nat'l Bank v. Yale Mining Corp., 39 Bankr. 201 (Bankr. W.D. Va. 1984).

The purpose of the required filing is to notify subsequent creditors of the claimed security interest. In re Varney Wood Prods., Inc., 327 F. Supp. 425 (W.D. Va. 1971), rev'd on other grounds, 458 F.2d 435 (4th Cir. 1972).

The creditor acquires a security interest only in collateral described in the financing statement, regardless of how extensive may have been the interest granted by the security agreement. In re Varney Wood Prods., Inc., 327 F. Supp. 425 (W.D. Va. 1971), rev'd on other grounds, 458 F.2d 435 (4th Cir. 1972).

The collateral term "personal property" includes a trade name and the good will inherent in it. In re C.C. & Co., 86 Bankr. 485 (Bankr. E.D. Va. 1988).

Hotel guest's room receipts were properly classified as personalty, and in order to perfect a security interest in the room receipts, a financing statement had to be properly filed in accordance with former § 8.9-302. In re Oceanview/Virginia Beach Real Estate Assocs., 116 Bankr. 57 (Bankr. E.D. Va. 1990).

Effect of consolidation of purchase money security interests. - When items which were previously purchased and covered by an earlier purchase money security interest were consolidated into a new purchase money security interest and were allowed to stand as security for the purchase price of items subsequently purchased, the instrument was no longer a purchase money security instrument, and it was removed from the "automatic perfection" provision of subdivision (1) (d) of former § 8.9-302. Butterworth Furn. Co. v. Penny, 15 Bankr. 124 (Bankr. E.D. Va. 1981). But see In re Leftwich, 174 Bankr. 54 (Bankr. W.D. Va. 1994).

Priority. - Since creditor complied with the filing requirements of §§ 8.9A-310 (a) and 8.9A-501 (a)(2) to perfect its security interest in the tenants' crops, its security interest took precedent pursuant to § 8.9A-334 (i) over the landlord's unperfected interest in the crops; therefore, the court granted the creditors' summary judgment motion on the issue of creditor priority. Dean v. Hall,, 2003 U.S. Dist. LEXIS 12720 (E.D. Va. Feb. 25, 2003).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-302(1), (2).

2. General Rule. Subsection (a) establishes a central article 9 principle: Filing a financing statement is necessary for perfection of security interests and agricultural liens. However, filing is not necessary to perfect a security interest that is perfected by another permissible method, see subsection (b), nor does filing ordinarily perfect a security interest in a deposit account, letter-of-credit right, or money. See section 9-312(b). Part 5 of the article deals with the office in which to file, mechanics of filing, and operations of the filing office.

3. Exemptions from Filing. Subsection (b) lists the security interests for which filing is not required as a condition of perfection, because they are perfected automatically upon attachment (subsections (b)(2) and (b)(9)) or upon the occurrence of another event (subsections (b)(1), (b)(5), and (b)(9)), because they are perfected under the law of another jurisdiction (subsection (b)(10)), or because they are perfected by another method, such as by the secured party's taking possession or control (subsections (b)(3), (b)(4), (b)(5), (b)(6), (b)(7), and (b)(8)).

4. Assignments of Perfected Security Interests. Subsection (c) concerns assignment of a perfected security interest or agricultural lien. It provides that no filing is necessary in connection with an assignment by a secured party to an assignee in order to maintain perfection as against creditors of and transferees from the original debtor.

Example 1: Buyer buys goods from Seller, who retains a security interest in them. After Seller perfects the security interest by filing, Seller assigns the perfected security interest to X. The security interest, in X's hands and without further steps on X's part, continues perfected against Buyer's transferees and creditors.

Example 2: Dealer creates a security interest in specific equipment in favor of Lender. After Lender perfects the security interest in the equipment by filing, Lender assigns the chattel paper (which includes the perfected security interest in Dealer's equipment) to X. The security interest in the equipment, in X's hands and without further steps on X's part, continues perfected against Dealer's transferees and creditors. However, regardless of whether Lender made the assignment to secure Lender's obligation to X or whether the assignment was an outright sale of the chattel paper, the assignment creates a security interest in the chattel paper in favor of X. Accordingly, X must take whatever steps may be required for perfection in order to be protected against Lender's transferees and creditors with respect to the chattel paper.

Subsection (c) applies not only to an assignment of a security interest perfected by filing but also to an assignment of a security interest perfected by a method other than by filing, such as by control or by possession. Although subsection (c) addresses explicitly only the absence of an additional filing requirement, the same result normally will follow in the case of an assignment of a security interest perfected by a method other than by filing. For example, as long as possession of collateral is maintained by an assignee or by the assignor or another person on behalf of the assignee, no further perfection steps need be taken on account of the assignment to continue perfection as against creditors and transferees of the original debtor. Of course, additional action may be required for perfection of the assignee's interest as against creditors and transferees of the assignor.

Similarly, subsection (c) applies to the assignment of a security interest perfected by compliance with a statute, regulation, or treaty under section 9-311(b), such as a certificate-of-title statute. Unless the statute expressly provides to the contrary, the security interest will remain perfected against creditors of and transferees from the original debtor, even if the assignee takes no action to cause the certificate of title to reflect the assignment or to cause its name to appear on the certificate of title. See PEB Commentary No. 12, which discusses this issue under former section 9-302(3). Compliance with the statute is "equivalent to filing" under section 9-311(b).

CASE NOTES

This section contemplates a Virginia certificate of title, not a foreign certificate, excluded by the provisions of former § 8.9-103. In re Smith, 311 F. Supp. 900 (W.D. Va. 1970), aff'd sub nom. Callaghan v. Commercial Credit Corp., 437 F.2d 898 (4th Cir. 1971).

Need for notation. - In order to perfect a security interest in a motor vehicle, a notation must appear on the vehicle's certificate of title. In re Johnson, 179 Bankr. 800 (Bankr. E.D. Va. 1995).

Security interest created under federal dairy termination program and filed in compliance with that program, but not recorded with the county was not properly perfected so as to have priority over all third party claimants including the trustee in bankruptcy. Since there was no authority offered to evidence a congressional intent to utilize the Code of Federal Regulations, 7 C.F.R. Part 709, to establish a centralized system for the national registration of security interests with respect to the dairy termination program. While its security interest might have been valid and enforceable under former § 8.9-203 (1), it did not have priority over the claim of a trustee in bankruptcy as of the date of the filing of the petition for relief and the creditor was an unsecured creditor to the extent of its claim as of that date. Leake v. Valley Feed Co. (In re Propst), 81 Bankr. 406 (Bankr. W.D. Va. 1988).

Duration of security interests in aircraft. - The combined intent of federal and state law is to provide that valid security interests in aircraft, properly recorded with the Federal Aviation Administration (FAA), have indefinite duration. Blair v. Crestar Bank (In re Brice), 225 Bankr. 124 (W.D. Va. 1998), aff'd, 188 F.3d 576 (4th Cir. 1999).

Relief from stay in bankruptcy proceedings. - In a bankruptcy proceeding, the key factor in determining whether to grant the motion of the assignee of the secured party for relief from the stay to repossess collateral was the classification of the collateral. If the goods were classified as consumer goods, then the assignee would not need to have filed a financing statement to have a perfected security interest in the collateral. However, if the goods were classified as equipment then, pursuant to former § 8.9-401 (1) (c), it would have been necessary for the assignee to have a dual filing to perfect its security interest. Creditway of Am. v. Phillips, 55 Bankr. 663 (Bankr. W.D. Va. 1985).

OFFICIAL COMMENT

Comment. -

[2010 Revisions to Official Comment]

1. Source. Former section 9-302(3), (4).
2. Federal Statutes, Regulations, and Treaties. Subsection (a)(1) exempts from the filing provisions of this article transactions as to which a system of filing - state or federal - has been established under federal law. Subsection (b) makes clear that when such a system exists, perfection of a relevant security interest can be achieved only through compliance with that system (i.e., filing under this article is not a permissible alternative).

   An example of the type of federal statute referred to in subsection (a)(1) is 49 U.S.C. sections 44107-11, for civil aircraft of the United States. The Assignment of Claims Act of 1940, as amended, provides for notice to contracting and disbursing officers and to sureties on bonds but does not establish a national filing system and therefore is not within the scope of subsection (a)(1). An assignee of a claim against the United States may benefit from compliance with the Assignment of Claims Act. But regardless of whether the assignee complies with that act, the assignee must file under this article in order to perfect its security interest against creditors and transferees of its assignor.

   Subsection (a)(1) provides explicitly that the filing requirement of this article defers only to federal statutes, regulations, or treaties whose requirements for a security interest's obtaining priority over the rights of a lien creditor preempt section 9-310(a). The provision eschews reference to the term "perfection," inasmuch as section 9-308 specifies the meaning of that term and a preemptive rule may use other terminology.

3. State Statutes. Subsections (a)(2) and (3) exempt from the filing requirements of this article transactions covered by state certificate-of-title statutes covering motor vehicles and the like. The description of certificate-of-title statutes in subsections (a)(2) and (a)(3) tracks the language of the definition of "certificate of title" in section 9-102. For a discussion of the operation of state certificate-of-title statutes in interstate contexts, see the comments to section 9-303.

   Some states have enacted central filing statutes with respect to secured transactions in kinds of property that are of special importance in the local economy. Subsection (a)(2) defers to these statutes with respect to filing for that property.

4. Inventory Covered by Certificate of Title. Under subsection (d), perfection of a security interest in the inventory of a person in the business of selling goods of that kind is governed by the normal perfection rules, even if the inventory is subject to a certificate-of-title statute. Compliance with a certificate-of-title statute is both unnecessary and ineffective to perfect a security interest in inventory to which this subsection applies. Thus, a secured party who finances an automobile dealer that is in the business of selling and leasing its inventory of automobiles can perfect a security interest in all the automobiles by filing a financing statement but not by compliance with a certificate-of-title statute.

   Subsection (d), and thus the filing and other perfection provisions of this Article, does not apply to inventory that is subject to a certificate-of-title statute and is of a kind that the debtor is not in the business of selling. For example, if goods are subject to a certificate-of-title statute and the debtor is in the business of leasing but not selling, goods of that kind, the other subsections of this section govern perfection of a security interest in the goods. The fact that the debtor eventually sells the goods does not, of itself, mean that the debtor "is in the business of selling goods of that kind."

   The filing and other perfection provisions of this Article apply to goods subject to a certificate-of-title statute only "during any period in which collateral is inventory held for sale or lease or leased." If the debtor takes goods of this kind out of inventory and uses them, say, as equipment, a filed financing statement would not remain effective to perfect a security interest.

5. Compliance with Perfection Requirements of Other Statute. Subsection (b) makes clear that compliance with the perfection requirements (i.e., the requirements for obtaining priority over a lien creditor), but not other requirements, of a statute, regulation, or treaty described in subsection (a), is sufficient for perfection under this article. Perfection of a security interest under such a statute, regulation, or treaty has all the consequences of perfection under this article.

   The interplay of this section with certain certificate-of-title statutes may create confusion and uncertainty. For example, statutes under which perfection does not occur until a certificate of title is issued will create a gap between the time that the goods are covered by the certificate under section 9-303 and the time of perfection. If the gap is long enough, it may result in turning some unobjectionable transactions into avoidable preferences under Bankruptcy Code section 547. (The preference risk arises if more than 30 days passes between the time a security interest attaches (or the debtor receives possession of the collateral, in the case of a purchase-money security interest) and the time it is perfected.) Accordingly, the legislative note to this section instructs the legislature to amend the applicable certificate-of-title statute to provide that perfection occurs upon receipt by the appropriate state official of a properly tendered application for a certificate of title on which the security interest is to be indicated.

   Under some certificate-of-title statutes, including the Uniform Motor Vehicle Certificate of Title and Anti-Theft Act, perfection generally occurs upon delivery of specified documents to a state official but may, under certain circumstances, relate back to the time of attachment. This relation-back feature can create great difficulties for the application of the rules in sections 9-303 and 9-311(b). Accordingly, the legislative note also recommends to legislatures that they remove any relation-back provisions from certificate-of-title statutes affecting security interests.

6. Compliance with Perfection Requirements of Other Statute as Equivalent to Filing. Under subsection (b), compliance with the perfection requirements (i.e., the requirements for obtaining priority over a lien creditor) of a statute, regulation, or treaty described in subsection (a) "is equivalent to the filing of a financing statement."

   The quoted phrase appeared in former section 9-302(3). Its meaning was unclear, and many questions arose concerning the extent to which and manner in which article 9 rules referring to "filing" were applicable to perfection by compliance with a certificate-of-title statute. This article takes a variety of approaches for applying article 9's filing rules to compliance with other statutes and treaties. First, as discussed above in comment 5, it leaves the determination of some rules, such as the rule establishing time of perfection (section 9-516(a)), to the other statutes themselves. Second, this article explicitly applies some article 9 filing rules to perfection under other statutes or treaties. See, e.g., section 9-505. Third, this article makes other article 9 rules applicable to security interests perfected by compliance with another statute through the "equivalent to . . . filing" provision in the first sentence of section 9-311(b). The third approach is reflected for the most part in occasional comments explaining how particular rules apply when perfection is accomplished under section 9-311(b). See, e.g., section 9-310, comment 4; section 9-315, comment 6; and section 9-317, comment 8. The absence of a comment indicating that a particular filing provision applies to perfection pursuant to section 9-311(b) does not mean the provision is inapplicable.

7. Perfection by Possession of Goods Covered by Certificate-of-Title Statute. A secured party who holds a security interest perfected under the law of State A in goods that subsequently are covered by a State B certificate of title may face a predicament. Ordinarily, the secured party will have four months under State B's section 9-316(c) and (d) in which to (re)perfect as against a purchaser of the goods by having its security interest noted on a State B certificate. This procedure is likely to require the cooperation of the debtor and any competing secured party whose security interest has been noted on the certificate. Comment 4(e) to former section 9-103 observed that "that cooperation is not likely to be forthcoming from an owner who wrongfully procured the issuance of a new certificate not showing the out-of-state security interest, or from a local secured party finding himself in a priority contest with the out-of-state secured party." According to that comment, "(t)he only solution for the out-of-state secured party under present certificate of title statutes seems to be to reperfect by possession, i.e., by repossessing the goods." But the "solution" may not have worked: Former section 9-302(4) provided that a security interest in property subject to a certificate-of-title statute "can be perfected only by compliance therewith."

   Sections 9-311(c), 9-313(b), and 9-316(d) and (e) of this article resolve the conflict by providing that a security interest that remains perfected solely by virtue of section 9-316(e) can be (re)perfected by the secured party's taking possession of the collateral. These sections contemplate only that taking possession of goods covered by a certificate of title will work as a method of perfection. None of these sections creates a right to take possession. Section 9-609 and the agreement of the parties define the secured party's right to take possession.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-304, with additions and some changes.

2. Instruments. Under subsection (a), a security interest in instruments may be perfected by filing. This rule represents an important change from former article 9, under which the secured party's taking possession of an instrument was the only method of achieving long-term perfection. The rule is likely to be particularly useful in transactions involving a large number of notes that a debtor uses as collateral but continues to collect from the makers. A security interest perfected by filing is subject to defeat by certain subsequent purchasers (including secured parties). Under section 9-330(d), purchasers for value who take possession of an instrument without knowledge that the purchase violates the rights of the secured party generally would achieve priority over a security interest in the instrument perfected by filing. In addition, section 9-331 provides that filing a financing statement does not constitute notice that would preclude a subsequent purchaser from becoming a holder in due course and taking free of all claims under section 3-306.

3. Chattel Paper; Negotiable Documents. Subsection (a) further provides that filing is available as a method of perfection for security interests in chattel paper and negotiable documents. Tangible chattel paper is sometimes delivered to the assignee, and sometimes left in the hands of the assignor for collection. Subsection (a) allows the assignee to perfect its security interest by filing in the latter case. Alternatively, the assignee may perfect by taking possession. See section 9-313(a). An assignee of electronic chattel paper may perfect by taking control. See sections 9-105 and 9-314(a). The security interest of an assignee who takes possession or control may qualify for priority over a competing security interest perfected by filing. See section 9-330.

Negotiable documents may be, and usually are, delivered to the secured party. See Article 1, Section 1-201 (definition of "delivery"). The secured party's taking possession of a tangible document or control of an electronic document will suffice as a perfection step. See sections 9-313(a), 9-314 and 7-106. However, as is the case with chattel paper, a security interest in a negotiable document may be perfected by filing.

4. Investment Property. A security interest in investment property, including certificated securities, uncertificated securities, security entitlements, and securities accounts, may be perfected by filing. However, security interests created by brokers, securities intermediaries, or commodity intermediaries are automatically perfected; filing is of no effect. See section 9-309(10) and (11). A security interest in all kinds of investment property also may be perfected by control, see sections 9-105 and 9-314, and a security interest in a certificated security also may be perfected by the secured party's taking delivery under section 8-301. See section 9-313(a). A security interest perfected only by filing is subordinate to a conflicting security interest perfected by control or delivery. See section 9-328(1) and (5). Thus, although filing is a permissible method of perfection, a secured party who perfects by filing takes the risk that the debtor has granted or will grant a security interest in the same collateral to another party who obtains control. Also, perfection by filing would not give the secured party protection against other types of adverse claims, since the article 8 adverse claim cut-off rules require control. See section 8-510.

5. Deposit Accounts. Under new subsection (b)(1), the only method of perfecting a security interest in a deposit account as original collateral is by control. Filing is ineffective, except as provided in section 9-315 with respect to proceeds. As explained in section 9-104, "control" can arise as a result of an agreement among the secured party, debtor, and bank, whereby the bank agrees to comply with instructions of the secured party with respect to disposition of the funds on deposit, even though the debtor retains the right to direct disposition of the funds. Thus, subsection (b)(1) takes an intermediate position between certain non-UCC law, which conditions the effectiveness of a security interest on the secured party's enjoyment of such dominion and control over the deposit account that the debtor is unable to dispose of the funds, and the approach this article takes to securities accounts, under which a secured party who is unable to reach the collateral without resort to judicial process may perfect by filing. By conditioning perfection on "control," rather than requiring the secured party to enjoy absolute dominion to the exclusion of the debtor, subsection (b)(1) permits perfection in a wide variety of transactions, including those in which the secured party actually relies on the deposit account in extending credit and maintains some meaningful dominion over it, but does not wish to deprive the debtor of access to the funds altogether.

6. Letter-of-Credit Rights. Letter-of-credit rights commonly are "supporting obligations," as defined in section 9-102. Perfection as to the related account, chattel paper, document, general intangible, instrument, or investment property will perfect as to the letter-of-credit rights. See section 9-308(d). Subsection (b)(2) provides that, in other cases, a security interest in a letter-of-credit right may be perfected only by control. "Control," for these purposes, is explained in section 9-107.

7. Goods Covered by Document of Title. Subsection (c) applies to goods in the possession of a bailee who has issued a negotiable document covering the goods. Subsection (d) applies to goods in the possession of a bailee who has issued a nonnegotiable document of title, including a document of title that is "non-negotiable" under section 7-104. Section 9-313 governs perfection of a security interest in goods in the possession of a bailee who has not issued a document of title.

Subsection (c) clarifies the perfection and priority rules in former section 9-304(2). Consistently with the provisions of article 7, subsection (c) takes the position that, as long as a negotiable document covering goods is outstanding, title to the goods is, so to say, locked up in the document. Accordingly, a security interest in goods covered by a negotiable document may be perfected by perfecting a security interest in the document. The security interest also may be perfected by another method, e.g., by filing. The priority rule in subsection (c) governs only priority between (i) a security interest in goods which is perfected by perfecting in the document and (ii) a security interest in the goods which becomes perfected by another method while the goods are covered by the document.

Example 1: While wheat is in a grain elevator and covered by a negotiable warehouse receipt, Debtor creates a security interest in the wheat in favor of SP-1 and SP-2. SP-1 perfects by filing a financing statement covering "wheat." Thereafter, SP-2 perfects by filing a financing statement describing the warehouse receipt. Subsection (c)(1) provides that SP-2's security interest is perfected. Subsection (c)(2) provides that SP-2's security interest is senior to SP-1's.

Example 2: The facts are as in Example 1, but SP-1's security interest attached and was perfected before the goods were delivered to the grain elevator. Subsection (c)(2) does not apply, because SP-1's security interest did not become perfected during the time that the wheat was in the possession of a bailee. Rather, the first-to-file-or-perfect priority rule applies. See sections 9-322 and 7-503.

A secured party may become "a holder to whom a negotiable document of title has been duly negotiated" under section 7-501. If so, the secured party acquires the rights specified by article 7. Article 9 does not limit those rights, which may include the right to priority over an earlier-perfected security interest. See section 9-331(a).

Subsection (d) takes a different approach to the problem of goods covered by a nonnegotiable document. Here, title to the goods is not looked on as being locked up in the document, and the secured party may perfect its security interest directly in the goods by filing as to them. The subsection provides two other methods of perfection: Issuance of the document in the secured party's name (as consignee of a straight bill of lading or the person to whom delivery would be made under a nonnegotiable warehouse receipt) and receipt of notification of the secured party's interest by the bailee. Perfection under subsection (d) occurs when the bailee receives notification of the secured party's interest in the goods, regardless of who sends the notification. Receipt of notification is effective to perfect, regardless of whether the bailee responds. Unlike former section 9-304(3), from which it derives, subsection (d) does not apply to goods in the possession of a bailee who has not issued a document of title. Section 9-313(c) covers that case and provides that perfection by possession as to goods not covered by a document requires the bailee's acknowledgment.

8. Temporary Perfection Without Having First Otherwise Perfected. Subsection (e) follows former section 9-304(4) in giving perfected status to security interests in certificated securities, instruments, and negotiable documents for a short period (reduced from 21 to 20 days, which is the time period generally applicable in this article), although there has been no filing and the collateral is in the debtor's possession or control. The 20-day temporary perfection runs from the date of attachment. There is no limitation on the purpose for which the debtor is in possession, but the secured party must have given "new value" (defined in section 9-102) under an authenticated security agreement.

9. Maintaining Perfection After Surrendering Possession. There are a variety of legitimate reasons - many of them are described in subsections (f) and (g) - why certain types of collateral must be released temporarily to a debtor. No useful purpose would be served by cluttering the files with records of such exceedingly short term transactions.

Subsection (f) affords the possibility of 20-day perfection in negotiable documents and goods in the possession of a bailee but not covered by a negotiable document. Subsection (g) provides for 20-day perfection in certificated securities and instruments. These subsections derive from former section 9-305(5). However, the period of temporary perfection has been reduced from 21 to 20 days, which is the time period generally applicable in this article, and "enforcement" has been added in subsection (g) as one of the special and limited purposes for which a secured party can release an instrument or certificated security to the debtor and still remain perfected. The period of temporary perfection runs from the date a secured party who already has a perfected security interest turns over the collateral to the debtor. There is no new value requirement, but the turnover must be for one or more of the purposes stated in subsection (f) or (g). The 20-day period may be extended by perfecting as to the collateral by another method before the period expires. However, if the security interest is not perfected by another method until after the 20-day period expires, there will be a gap during which the security interest is unperfected.

Temporary perfection extends only to the negotiable document or goods under subsection (f) and only to the certificated security or instrument under subsection (g). It does not extend to proceeds. If the collateral is sold, the security interest will continue in the proceeds for the period specified in section 9-315.

Subsections (f) and (g) deal only with perfection. Other sections of this article govern the priority of a security interest in goods after surrender of possession or control of the document covering them. In the case of a purchase-money security interest in inventory, priority may be conditioned upon giving notification to a prior inventory financer. See section 9-324.

CASE NOTES

Possession of copy of partnership agreement. - Where debtor, as partial security for a debt represented by a note, surrendered to creditor bank a copy of a partnership agreement between the debtor and several other individuals, the assets of which partnership included a 75% interest in certain lode mining claims which had been conveyed to the partners by quit-claim deed, and the bank did not file a financing statement or otherwise record the secured transaction, the writings surrendered to the bank by the debtor were not sufficient to perfect the bank's security interest in the debtor's partnership interest. First Nat'l Exch. Bank v. Kelly, 21 Bankr. 495 (Bankr. W.D. Va. 1982) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 9-115(6) and 9-305.

2. Perfection by Possession. As under the common law of pledge, no filing is required by this article to perfect a security interest if the secured party takes possession of the collateral. See section 9-310(b)(6).

This section permits a security interest to be perfected by the taking of possession only when the collateral is goods, instruments, tangible negotiable documents, money, or tangible chattel paper. Accounts, commercial tort claims, deposit accounts, investment property, letter-of-credit rights, letters of credit, and oil, gas, or other minerals before extraction are excluded. (But see comment 6, below, regarding certificated securities.) A security interest in accounts and payment intangibles - property not ordinarily represented by any writing whose delivery operates to transfer the right to payment - may under this article be perfected only by filing. This rule would not be affected by the fact that a security agreement or other record described the assignment of such collateral as a "pledge." Section 9-309(2) exempts from filing certain assignments of accounts or payment intangibles which are out of the ordinary course of financing. These exempted assignments are perfected when they attach. Similarly, under section 9-309(3), sales of payment intangibles are automatically perfected.

3. "Possession." This section does not define "possession." It adopts the general concept as it developed under former Article 9. As under former Article 9, in determining whether a particular person has possession, the principles of agency apply. For example, if the collateral is in possession of an agent of the secured party for the purposes of possessing on behalf of the secured party, and if the agent is not also an agent of the debtor, the secured party has taken actual possession, and subsection (c) does not apply. Sometimes a person holds collateral both as an agent of the secured party and as an agent of the debtor. The fact of dual agency is not of itself inconsistent with the secured party's having taken possession (and thereby having rendered subsection (c) inapplicable). The debtor cannot qualify as an agent for the secured party for purposes of the secured party's taking possession. And, under appropriate circumstances, a court may determine that a person in possession is so closely connected to or controlled by the debtor that the debtor has retained effective possession, even though the person may have agreed to take possession on behalf of the secured party. If so, the person's taking possession would not constitute the secured party's taking possession and would not be sufficient for perfection. See also Section 9-205(b). In a typical escrow arrangement, where the escrowee has possession of collateral as agent for both the secured party and the debtor, the debtor's relationship to the escrowee is not such as to constitute retention of possession by the debtor.

4. Goods in Possession of Third Party: Perfection. Former section 9-305 permitted perfection of a security interest by notification to a bailee in possession of collateral. This article distinguishes between goods in the possession of a bailee who has issued a document of title covering the goods and goods in the possession of a third party who has not issued a document. Section 9-312(c) or (d) applies to the former, depending on whether the document is negotiable. Section 9-313(c) applies to the latter. It provides a method of perfection by possession when the collateral is possessed by a third person who is not the secured party's agent.

Notification of a third person does not suffice to perfect under section 9-313(c). Rather, perfection does not occur unless the third person authenticates an acknowledgment that it holds possession of the collateral for the secured party's benefit. Compare section 9-312(d), under which receipt of notification of the security party's interest by a bailee holding goods covered by a nonnegotiable document is sufficient to perfect, even if the bailee does not acknowledge receipt of the notification. A third person may acknowledge that it will hold for the secured party's benefit goods to be received in the future. Under these circumstances, perfection by possession occurs when the third person obtains possession of the goods.

Under subsection (c), acknowledgment of notification by a "lessee . . . in . . . ordinary course of . . . business" (defined in section 2A-103) does not suffice for possession. The section thus rejects the reasoning of In re Atlantic Systems, Inc., 135 B.R. 463 (Bankr. S.D.N.Y. 1992) (holding that notification to debtor-lessor's lessee sufficed to perfect security interest in leased goods). See Steven O. Weise, Perfection by Possession: The Need for an Objective Test, 29 Idaho Law Rev. 705 (1992-93) (arguing that lessee's possession in ordinary course of debtor-lessor's business does not provide adequate public notice of possible security interest in leased goods). Inclusion of a per se rule concerning lessees is not meant to preclude a court, under appropriate circumstances, from determining that a third person is so closely connected to or controlled by the debtor that the debtor has retained effective possession. If so, the third person's acknowledgment would not be sufficient for perfection.

In some cases, it may be uncertain whether a person who has possession of collateral is an agent of the secured party or a non-agent bailee. Under those circumstances, prudence might suggest that the secured party obtain the person's acknowledgment to avoid litigation and ensure perfection by possession regardless of how the relationship between the secured part and the person is characterized.

5. No Relation Back. Former section 9-305 provided that a security interest is perfected by possession from the time possession is taken "without a relation back." As the comment to former section 9-305 observed, the relation-back theory, under which the taking of possession was deemed to relate back to the date of the original security agreement, has had little vitality since the 1938 revision of the Federal Bankruptcy Act. The theory is inconsistent with former article 9 and with this article. See section 9-313(d). Accordingly, this article deletes the quoted phrase as unnecessary. Where a pledge transaction is contemplated, perfection dates only from the time possession is taken, although a security interest may attach, unperfected. The only exceptions to this rule are the short, 20-day periods of perfection provided in section 9-312(e), (f), and (g), during which a debtor may have possession of specified collateral in which there is a perfected security interest.

6. Certificated Securities. The second sentence of subsection (a) reflects the traditional rule for perfection of a security interest in certificated securities. Compare sections 8-313(1)(a) and 8-321 (1978 Official Text); section 9-115(6) (1994 Official Text); and section 9-305 (1972 Official Text). It has been modified to refer to "delivery" under section 8-301. Corresponding changes appear in section 9-203(b).

Subsections (e), (f), and (g), which are new, apply to a person in possession of security certificates or holding security certificates for the secured party's benefit under section 8-301. For delivery to occur when a person other than a secured party holds possession for the secured party, the person may not be a securities intermediary.

Under subsection (e), a possessory security interest in a certificated security remains perfected until the debtor obtains possession of the security certificate. This rule is analogous to that of section 9-314(c), which deals with perfection of security interests in investment property by control. See section 9-314, comment 3.

7. Goods Covered by Certificate of Title. Subsection (b) is necessary to effect changes to the choice-of-law rules governing goods covered by a certificate of title. These changes are described in the comments to section 9-311. Subsection (b), like subsection (a), does not create a right to take possession. Rather, it indicates the circumstances under which the secured party's taking possession of goods covered by a certificate of title is effective to perfect a security interest in the goods: The goods become covered by a certificate of title issued by this state at a time when the security interest is perfected by any method under the law of another jurisdiction.

8. Goods in Possession of Third Party: No Duty to Acknowledge; Consequences of Acknowledgment. Subsections (f) and (g) are new and address matters as to which former article 9 was silent. They derive in part from section 8-106(g). Subsection (f) provides that a person in possession of collateral is not required to acknowledge that it holds for a secured party. Subsection (g)(1) provides that an acknowledgment is effective even if wrongful as to the debtor. Subsection (g)(2) makes clear that an acknowledgment does not give rise to any duties or responsibilities under this article. Arrangements involving the possession of goods are hardly standardized. They include bailments for services to be performed on the goods (such as repair or processing), for use (leases), as security (pledges), for carriage, and for storage. This article leaves to the agreement of the parties and to any other applicable law the imposition of duties and responsibilities upon a person who acknowledges under subsection (c). For example, by acknowledging, a third party does not become obliged to act on the secured party's direction or to remain in possession of the collateral unless it agrees to do so or other law so provides.

9. Delivery to Third Party by Secured Party. New subsections (h) and (i) address the practice of mortgage warehouse lenders. These lenders typically send mortgage notes to prospective purchasers under cover of letters advising the prospective purchasers that the lenders hold security interests in the notes. These lenders relied on notification to maintain perfection under former section 9-305. Requiring them to obtain authenticated acknowledgments from each prospective purchaser under subsection (c) could be unduly burdensome and disruptive of established practices. Under subsection (h), when a secured party in possession itself delivers the collateral to a third party, instructions to the third party would be sufficient to maintain perfection by possession; an acknowledgment would not be necessary. Under subsection (i), the secured party does not relinquish possession by making a delivery under subsection (h), even if the delivery violates the rights of the debtor. That subsection also makes clear that a person to whom collateral is delivered under subsection (h) does not owe any duty to the secured party and is not required to confirm the delivery to another person unless the person otherwise agrees or law other than this article provides otherwise.

OFFICIAL COMMENT

Comment. - 1. Source. Substantially new; derived in part from former section 9-115(4).

2. Control. This section provides for perfection by control with respect to investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, and electronic documents. For explanations of how a secured party takes control of these types of collateral, see sections 9-104 through 9-107 and Section 7-106. Subsection (b) explains when a security interest is perfected by control and how long a security interest remains perfected by control. Like section 9-313(d) and for the same reasons, subsection (b) makes no reference to the doctrine of "relation back." See section 9-313, comment 5. As to an electronic document that is reissued in a tangible medium, Section 7-105, a secured party that is perfected by control in the electronic document should file as to the document before relinquishing control in order to maintain continuous perfection in the document. See Section 9-308.

3. Investment Property. Subsection (c) provides a special rule for investment property. Once a secured party has control, its security interest remains perfected by control until the secured party ceases to have control and the debtor receives possession of collateral that is a certificated security, becomes the registered owner of collateral that is an uncertificated security, or becomes the entitlement holder of collateral that is a security entitlement. The result is particularly important in the "repledge" context. See section 9-207, comment 5.

In a transaction in which a secured party who has control grants a security interest in investment property or sells outright the investment property, by virtue of the debtor's consent or applicable legal rules, a purchaser from the secured party typically will cut off the debtor's rights in the investment property or be immune from the debtor's claims. See section 9-207, comments 5 and 6. If the investment property is a security, the debtor normally would retain no interest in the security following the purchase from the secured party, and a claim of the debtor against the secured party for redemption (section 9-623) or otherwise with respect to the security would be a purely personal claim. If the investment property transferred by the secured party is a financial asset in which the debtor had a security entitlement credited to a securities account maintained with the secured party as a securities intermediary, the debtor's claim against the secured party could arise as a part of its securities account notwithstanding its personal nature. (This claim would be analogous to a "credit balance" in the securities account, which is a component of the securities account even though it is a personal claim against the intermediary.) In the case in which the debtor may retain an interest in investment property notwithstanding a repledge or sale by the secured party, subsection (c) makes clear that the security interest will remain perfected by control.

CASE NOTES

Courts would liberally construe former § 8.9-306 (see now this section). Reymet Fed. Credit Union v. Jones, 19 Bankr. 293 (Bankr. E.D. Va. 1982).

Applicability to sales of inventory. - Former § 9-306 (see now this section) appears to apply primarily to situations where inventory is sold. In those situations, the parties contemplate that the collateral will be sold free and clear of the security interest. The secured party remains protected because the Code provides that its security interest will continue in the proceeds of the sale of the collateral. Richmond Fixture & Equip. Co. v. Hyman (In re S. Properties, Inc.), 44 Bankr. 838 (Bankr. E.D. Va. 1984).

Authorization may nullify security interest in collateral but not proceeds. - Under subsection (2) of former § 8.9-306 (see now this section), a secured party's authorization may nullify its security interest in the collateral so long as there is a clear manifestation of the secured party's intent that the collateral be transferred free and clear of its security interest. However, the authorized disposition of the collateral has no effect on the secured party's security interest in the proceeds of the disposition. Unsecured Creditors Comm. v. Marepcon Fin. Corp., 907 F.2d 1430 (4th Cir. 1990).

Post-bankruptcy petition proceeds of pre-petition collateral. - Subsection (3) of former § 8.9-306 (see now this section) is the proper approach to analyzing whether a security agreement extends to post-bankruptcy petition proceeds of pre-petition collateral. Unsecured Creditors Comm. v. Marepcon Fin. Corp., 907 F.2d 1430 (4th Cir. 1990), holding that debtor had a properly perfected security interest in creditors post-petition inventory as well as in any post-petition accounts and cash generated therefrom.

Funds commingled prior to filing bankruptcy. - Subsection (4) of former § 8.9-306 (see now this section) governs the extent of a creditor's interest in commingled proceeds only up to and including the instant of commencement of insolvency proceedings. As a result, it specifically deals with cases in which funds are commingled prior to filing bankruptcy, and not to cases in which funds are commingled after filing. Unsecured Creditors Comm. v. Marepcon Fin. Corp., 907 F.2d 1430 (4th Cir. 1990).

Bankruptcy and district courts erred in holding that "tracing" principles that would have determined a creditor's perfected security interest at the time of alleged preference payments from commingled funds of an automobile dealership pursuant to a "floor plan" financing arrangement were relevant to the bankruptcy trustee's claims under 11 U.S.C.S. § 547(b)(5); the proper formula for determining the creditor's security interest was set forth in § 8.9-306 [now this section], which did not depend on tracing the proceeds of collateral. Hall v. Chrysler Credit Corp. (In re JKJ Chevrolet, Inc.), 412 F.3d 545, 2005 U.S. App. LEXIS 11960 (4th Cir. 2005).

Preferential transfer in bankruptcy. - Chapter 7 trustee was entitled to a judgment in his favor in a preferential transfer action brought against a motor vehicle floor plan lender under 11 U.S.C.S. § 547(b) because, applying the formula in former § 8.9-306 [now this section], creditor received more in preference payments than it would have in a Chapter 7 case; former section § 8.9-306(4) effectively limited the amount of creditor's secured claim to an amount not greater than total cash proceeds less payments during the 20 days preceding bankruptcy. Hall v. Chrysler Credit Corp. (In re JKJ Chevrolet, Inc.),, 2007 Bankr. LEXIS 424 (Bankr. E.D. Va. Feb. 2, 2007).

No duty owed subordinate interests to enforce remedies. - The priority of a perfected security interest is not affected by the fact that a secured party, in order to assist the debtor and to enhance the likelihood of satisfaction of any indebtedness, agreed not to declare the debtor in default, since a secured creditor does not owe any duty to those holding subordinate interests to proceed to enforce his remedies. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

Notice of third party in a deposit account. - If a bank may be charged with notice of the interest of a third party in a deposit account, it may not apply the account to satisfy a debt owed by the depositor. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

Continuation of security interest after authorized sale. - An electrical contractor's creditor's security interest in electrical supplies to be installed in a school under construction would not continue after disposition of the goods to the school's general contractor where, under the terms of the contract between the general contractor and the electrical contractor, there was an authorized sale as defined by § 8.2-106 (1) within the contemplation of the terms of the security agreement. Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844 , 263 S.E.2d 408 (1980).

Under the terms of subsection (2) of former § 8.9-306 (see now this section), a security interest continues in collateral notwithstanding sales, and also continues in any identifiable proceeds. John Deskins Pic Pac, Inc. v. Flat Top Nat'l Bank, 59 Bankr. 809 (Bankr. W.D. Va. 1986).

Failure of the secured party to check the proceeds box on a financing statement has no effect on the continuation of its security interest in proceeds. John Deskins Pic Pac, Inc. v. Flat Top Nat'l Bank, 59 Bankr. 809 (Bankr. W.D. Va. 1986).

However, this security interest in proceeds ceases to be a perfected security interest and becomes unperfected 20 days after receipt of the proceeds by the debtor unless one of the subdivisions of subsection (3) of former § 8.9-306 (see now this section) is met. John Deskins Pic Pac, Inc. v. Flat Top Nat'l Bank, 59 Bankr. 809 (Bankr. W.D. Va. 1986).

Loss of security interest in collateral. - In view of the objective sought to be accomplished by subsection (2) of former § 8.9-306 (see now this section), a secured party only forfeits its security interest in collateral pursuant to this section when collateral is authorized by the secured party to be transferred free and clear of that party's security interest. Richmond Fixture & Equip. Co. v. Hyman (In re S. Properties, Inc.), 44 Bankr. 838 (Bankr. E.D. Va. 1984).

The provision in subsection (2) of former § 8.9-306 (see now this section) should be construed so that a secured party's security interest in transferred collateral is lost only where there is a clear manifestation of the secured party's intent that the collateral be transferred free and clear of its security interest. Richmond Fixture & Equip. Co. v. Hyman (In re S. Properties, Inc.), 44 Bankr. 838 (Bankr. E.D. Va. 1984).

Under subsection (2) of former § 8.9-306 (see now this section), a secured party only forfeits its security interest in collateral when it authorizes that the collateral be transferred free and clear of its security interest. If the transfer is not authorized, the secured party maintains his security interest. Creditway of Am., Inc. v. Brubaker, 57 Bankr. 736 (Bankr. W.D. Va. 1986).

Implied authorization to sell in agreement by automobile floor-plan financier. - Even if language of a security agreement between a floor-plan financier and an automobile dealer authorizing sale of cars was absent or unclear, it is customary that when inventory is delivered to a dealer-debtor, the secured party gives an implied if not an express authorization that the collateral is to be sold; thus, it is axiomatic that when a sale is made, the secured party surrenders its claim in the inventory to the one who makes the purchase from the dealer in the ordinary course of business. GMAC v. Frank Meador Leasing, Inc., 6 Bankr. 910 (Bankr. W.D. Va. 1980).

Where an automobile dealer sold an automobile to a leasing company at a discount, and where the dealership and the leasing company were owned by the same person, the transaction was, nevertheless, in the ordinary course of business and extinguished a floor-plan financier's security interest in the automobile. GMAC v. Frank Meador Leasing, Inc., 6 Bankr. 910 (Bankr. W.D. Va. 1980).

Insurance payments are proceeds when they are payable by reason of loss or damage to secured collateral. Reymet Fed. Credit Union v. Jones, 19 Bankr. 293 (Bankr. E.D. Va. 1982).

Proceeds of judgment against broker not insurance proceeds. - Funds received from independent broker on account of a personal judgment obtained against broker for failure to procure collision insurance did not constitute insurance proceeds of collateral vehicle. Reymet Fed. Credit Union v. Jones, 19 Bankr. 293 (Bankr. E.D. Va. 1982).

Funds from debtor's sale of inventory and collection of accounts. - Funds received by debtor from the sale of its inventory and collection of accounts were cash proceeds, and creditor's security interest in debtor's pre-petition inventory and accounts continued in the cash proceeds, so long as they were identifiable. Unsecured Creditors Comm. v. Marepcon Fin. Corp., 907 F.2d 1430 (4th Cir. 1990).

A forfeited earnest money deposit received upon the disposition of property should be classified as proceeds. Old Stone Bank v. Tycon I Bldg. Ltd. Partnership, 946 F.2d 271 (4th Cir. 1991).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-306.

2. Continuation of Security Interest or Agricultural Lien Following Disposition of Collateral. Subsection (a)(1)(A), which derives from former section 9-306(2), contains the general rule that a security interest survives disposition of the collateral. In these cases, the secured party may repossess the collateral from the transferee or, in an appropriate case, maintain an action for conversion. The secured party may claim both any proceeds and the original collateral but, of course, may have only one satisfaction.

In many cases, a purchaser or other transferee of collateral will take free of a security interest, and the secured party's only right will be to proceeds. For example, the general rule does not apply, and a security interest does not continue in collateral, if the secured party authorized the disposition, in the agreement that contains the security agreement or otherwise. Subsection (a)(1)(A) adopts the view of PEB Commentary No. 3 and makes explicit that the authorized disposition to which it refers is an authorized disposition "free of" the security interest or agricultural lien. The secured party's right to proceeds under this section or under the express terms of an agreement does not in itself constitute an authorization of disposition. The change in language from former section 9-306(2) is not intended to address the frequently litigated situation in which the effectiveness of the secured party's consent to a disposition is conditioned upon the secured party's receipt of the proceeds. In that situation, subsection (a) leaves the determination of authorization to the courts, as under former article 9.

This article contains several provisions under which a transferee takes free of a security interest or agricultural lien. For example, section 9-317 states when transferees take free of unperfected security interests; sections 9-320 and 9-321 on goods, 9-321 on general intangibles, 9-330 on chattel paper and instruments, and 9-331 on negotiable instruments, negotiable documents, and securities state when purchasers of such collateral take free of a security interest, even though perfected and even though the disposition was not authorized. Section 9-332 enables most transferees (including nonpurchasers) of funds from a deposit account and most transferees of money to take free of a perfected security interest in the deposit account or money.

Likewise, the general rule that a security interest survives disposition does not apply if the secured party entrusts goods collateral to a merchant who deals in goods of that kind and the merchant sells the collateral to a buyer in ordinary course of business. Section 2-403(2) gives the merchant the power to transfer all the secured party's rights to the buyer, even if the sale is wrongful as against the secured party. Thus, under subsection (a)(1)(A), an entrusting secured party runs the same risk as any other entruster.

3. Secured Party's Right to Identifiable Proceeds. Under subsection (a)(1)(B), which derives from former section 9-306(2), a security interest attaches to any identifiable "proceeds," as defined in section 9-102. See also section 9-203(f). Subsection (b) is new. It indicates when proceeds commingled with other property are identifiable proceeds and permits the use of whatever methods of tracing other law permits with respect to the type of property involved. Among the "equitable principles" whose use other law may permit is the "lowest intermediate balance rule." See Restatement (2d), Trusts section 202.

4. Automatic Perfection in Proceeds: General Rule. Under subsection (c), a security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected. This article extends the period of automatic perfection in proceeds from 10 days to 20 days. Generally, a security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds. See subsection (d). The loss of perfected status under subsection (d) is prospective only. Compare, e.g., section 9-515(c) (deeming security interest unperfected retroactively).

5. Automatic Perfection in Proceeds: Proceeds Acquired with Cash Proceeds. Subsection (d)(1) derives from former section 9-306(3)(a). It carries forward the basic rule that a security interest in proceeds remains perfected beyond the period of automatic perfection if a filed financing statement covers the original collateral (e.g., inventory) and the proceeds are collateral in which a security interest may be perfected by filing in the office where the financing statement has been filed (e.g., equipment). A different rule applies if the proceeds are acquired with cash proceeds, as is the case if the original collateral (inventory) is sold for cash (cash proceeds) that is used to purchase equipment (proceeds). Under these circumstances, the security interest in the equipment proceeds remains perfected only if the description in the filed financing indicates the type of property constituting the proceeds (e.g., "equipment").

This section reaches the same result but takes a different approach. It recognizes that the treatment of proceeds acquired with cash proceeds under former section 9-306(3)(a) essentially was superfluous. In the example, had the filing covered "equipment" as well as "inventory," the security interest in the proceeds would have been perfected under the usual rules governing after-acquired equipment (see former sections 9-302 and 9-303); paragraph (3)(a) added only an exception to the general rule. Subsection (d)(1)(C) of this section takes a more direct approach. It makes the general rule of continued perfection inapplicable to proceeds acquired with cash proceeds, leaving perfection of a security interest in those proceeds to the generally applicable perfection rules under subsection (d)(3).

Example 1: Lender perfects a security interest in Debtor's inventory by filing a financing statement covering "inventory." Debtor sells the inventory and deposits the buyer's check into a deposit account. Debtor draws a check on the deposit account and uses it to pay for equipment. Under the "lowest intermediate balance rule," which is a permitted method of tracing in the relevant jurisdiction, see comment 3, the funds used to pay for the equipment were identifiable proceeds of the inventory. Because the proceeds (equipment) were acquired with cash proceeds (deposit account), subsection (d)(1) does not extend perfection beyond the 20-day automatic period.

Example 2: Lender perfects a security interest in Debtor's inventory by filing a financing statement covering "all debtor's property." As in Example 1, Debtor sells the inventory, deposits the buyer's check into a deposit account, draws a check on the deposit account, and uses the check to pay for equipment. Under the "lowest intermediate balance rule," which is a permitted method of tracing in the relevant jurisdiction, see comment 3, the funds used to pay for the equipment were identifiable proceeds of the inventory. Because the proceeds (equipment) were acquired with cash proceeds (deposit account), subsection (d)(1) does not extend perfection beyond the 20-day automatic period. However, because the financing statement is sufficient to perfect a security interest in debtor's equipment, under subsection (d)(3) the security interest in the equipment proceeds remains perfected beyond the 20-day period.

6. Automatic Perfection in Proceeds: Lapse or Termination of Financing Statement During 20-Day Period; Perfection Under Other Statute or Treaty. Subsection (e) provides that a security interest in proceeds perfected under subsection (d)(1) ceases to be perfected when the financing statement covering the original collateral lapses or is terminated. If the lapse or termination occurs before the 21st day after the security interest attaches, however, the security interest in the proceeds remains perfected until the 21st day. Section 9-311(b) provides that compliance with the perfection requirements of a statute or treaty described in section 9-311(a) "is equivalent to the filing of a financing statement." It follows that collateral subject to a security interest perfected by such compliance under section 9-311(b) is covered by a "filed financing statement" within the meaning of section 9-315(d) and (e).

7. Automatic Perfection in Proceeds: Continuation of Perfection in Cash Proceeds. Former section 9-306(3)(b) provided that if a filed financing statement covered original collateral, a security interest in identifiable cash proceeds of the collateral remained perfected beyond the ten-day period of automatic perfection. Former section 9-306(3)(c) contained a similar rule with respect to identifiable cash proceeds of investment property. Subsection (d)(2) extends the benefits of former sections 9-306(3)(b) and (3)(c) to identifiable cash proceeds of all types of original collateral in which a security interest is perfected by any method. Under subsection (d)(2), if the security interest in the original collateral was perfected, a security interest in identifiable cash proceeds will remain perfected indefinitely, regardless of whether the security interest in the original collateral remains perfected. In many cases, however, a purchaser or other transferee of the cash proceeds will take free of the perfected security interest. See, e.g., sections 9-330(d) (purchaser of check), 9-331 (holder in due course of check), and 9-332 (transferee of money or funds from a deposit account).

8. Insolvency Proceedings; Returned and Repossessed Goods. This article deletes former section 9-306(4), which dealt with proceeds in insolvency proceedings. Except as otherwise provided by the Bankruptcy Code, the debtor's entering into bankruptcy does not affect a secured party's right to proceeds.

This article also deletes former section 9-306(5), which dealt with returned and repossessed goods. Section 9-330, comments 9 to 11, explain and clarify the application of priority rules to returned and repossessed goods as proceeds of chattel paper.

9. Proceeds of Collateral Subject to Agricultural Lien. This article does not determine whether a lien extends to proceeds of farm products encumbered by an agricultural lien. If, however, the proceeds are themselves farm products on which an "agricultural lien" (defined in section 9-102) arises under other law, then the agricultural-lien provisions of this article apply to the agricultural lien on the proceeds in the same way in which they would apply had the farm products not been proceeds.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-103(1)(d), (2)(b), (3)(e), as modified.

2. Continued Perfection. Subsections (a) through (g) deal with continued perfection of security interests that have been perfected under the law of another jurisdiction. The fact that the law of a particular jurisdiction ceases to govern perfection under Sections 9-301 through 9-307 does not necessarily mean that a security interest perfected under that law automatically becomes unperfected. To the contrary: This section generally provides that a security interest perfected under the law of one jurisdiction remains perfected for a fixed period of time (four months or one year, depending on the circumstances), even though the jurisdiction whose law governs perfection changes. However, cessation of perfection under the law of the original jurisdiction cuts short the fixed period. The four-month and one-year periods are long enough for a secured party to discover in most cases that the law of a different jurisdiction governs perfection and to reperfect (typically by filing) under the law of that jurisdiction. If a secured party properly reperfects a security interest before it becomes unperfected under subsection (a), then the security interest remains perfected continuously thereafter. See subsection (b).

Example 1: Debtor is a general partnership whose chief executive office is in Pennsylvania. Lender perfects a security interest in Debtor's equipment by filing in Pennsylvania on May 15, 2002. On April 1, 2005, without Lender's knowledge, Debtor moves its chief executive office to New Jersey. Lender's security interest remains perfected for four months after the move. See subsection (a)(2).

Example 2: Debtor is a general partnership whose chief executive office is in Pennsylvania. Lender perfects a security interest in Debtor's equipment by filing in Pennsylvania on May 15, 2002. On April 1, 2007, without Lender's knowledge, Debtor moves its chief executive office to New Jersey. Lender's security interest remains perfected only through May 14, 2007, when the effectiveness of the filed financing statement lapses. See subsection (a)(1). Although, under these facts, Lender would have only a short period of time to discover that Debtor had relocated and to reperfect under New Jersey law, Lender could have protected itself by filing a continuation statement in Pennsylvania before Debtor relocated. By doing so, Lender would have prevented lapse and allowed itself the full four months to discover Debtor's new location and refile there or, if Debtor is in default, to perfect by taking possession of the equipment.

Example 3: Under the facts of Example 2, Lender files a financing statement in New Jersey before the effectiveness of the Pennsylvania financing statement lapses. Under subsection (b), Lender's security interest is continuously perfected beyond May 14, 2007, for a period determined by New Jersey's article 9.

Subsection (a)(3) allows a one-year period in which to reperfect. The longer period is necessary, because, even with the exercise of due diligence, the secured party may be unable to discover that the collateral has been transferred to a person located in another jurisdiction. In any event, the period is cut short if the financing statement becomes ineffective under the law of the jurisdiction in which it is filed.

Example 4: Debtor is a Pennsylvania corporation. On January 1, Lender perfects a security interest in Debtor's equipment by filing in Pennsylvania. Debtor's shareholders decide to "reincorporate" in Delaware. On March 1, they form a Delaware corporation (Newcorp) into which they merge Debtor. The merger effectuates a transfer of the collateral from Debtor to Newcorp, which thereby becomes a debtor and is located in another jurisdiction. Under subsection (a)(3), the security interest remains perfected for one year after the merger. If a financing statement is filed in Delaware against Newcorp within the year following the merger, then the security interest remains perfected thereafter for a period determined by Delaware's article 9.

Note that although Newcorp is a "new debtor" as defined in section 9-102, the application of subsection (a)(3) is not limited to transferees who are new debtors. Note also that, under section 9-507, the financing statement naming Debtor remains effective even though Newcorp has become the debtor.

Subsection (a) addresses security interests that are perfected (i.e., that have attached and as to which any required perfection step has been taken) before the debtor changes its location. Subsection (h) applies to security interests that have not attached before the location changes. See Comment 7.

3. Retroactive Unperfection. Subsection (b) sets forth the consequences of the failure to reperfect before perfection ceases under subsection (a): The security interest becomes unperfected prospectively and, as against purchasers for value, including buyers and secured parties, but not as against donees or lien creditors, retroactively. The rule applies to agricultural liens, as well. See also section 9-515 (taking the same approach with respect to lapse). Although this approach creates the potential for circular priorities, the alternative - retroactive unperfection against lien creditors - would create substantial and unjustifiable preference risks.

Example 5: Under the facts of Example 4, six months after the merger, Buyer bought from Newcorp some equipment formerly owned by Debtor. At the time of the purchase, Buyer took subject to Lender's perfected security interest, of which Buyer was unaware. See section 9-315(a)(1)(A). However, subsection (b) provides that if Lender fails to reperfect in Delaware within a year after the merger, its security interest becomes unperfected and is deemed never to have been perfected against Buyer. Having given value and received delivery of the equipment without knowledge of the security interest and before it was perfected, Buyer would take free of the security interest. See section 9-317(b).

Example 6: Under the facts of Example 4, one month before the merger, Debtor created a security interest in certain equipment in favor of Financer, who perfected by filing in Pennsylvania. At that time, Financer's security interest is subordinate to Lender's. See section 9-322(a)(1). Financer reperfects by filing in Delaware within a year after the merger, but Lender fails to do so. Under subsection (b), Lender's security interest is deemed never to have been perfected against Financer, a purchaser for value. Consequently, under section 9-322(a)(2), Financer's security interest is now senior.

Of course, the expiration of the time period specified in subsection (a) does not of itself prevent the secured party from later reperfecting under the law of the new jurisdiction. If the secured party does so, however, there will be a gap in perfection, and the secured party may lose priority as a result. Thus, in Example 6, if Lender perfects by filing in Delaware more than one year under the merger, it will have a new date of filing and perfection for purposes of section 9-322(a)(1). Financer's security interest, whose perfection dates back to the filing in Pennsylvania under subsection (b), will remain senior.

4. Possessory Security Interests. Subsection (c) deals with continued perfection of possessory security interests. It applies not only to security interests perfected solely by the secured party's having taken possession of the collateral. It also applies to security interests perfected by a method that includes as an element of perfection the secured party's having taken possession, such as perfection by taking delivery of a certificated security in registered form, see section 9-313(a), and perfection by obtaining control over a certificated security. See section 9-314(a).

5. Goods Covered by Certificate of Title. Subsections (d) and (e) address continued perfection of a security interest in goods covered by a certificate of title. The following examples explain the operation of those subsections.

Example 7: Debtor's automobile is covered by a certificate of title issued by Illinois. Lender perfects a security interest in the automobile by complying with Illinois' certificate-of-title statute. Thereafter, Debtor applies for a certificate of title in Indiana. Six months thereafter, Creditor acquires a judicial lien on the automobile. Under section 9-303(b), Illinois law ceases to govern perfection; rather, once Debtor delivers the application and applicable fee to the appropriate Indiana authority, Indiana law governs. Nevertheless, under Indiana's section 9-316(d), Lender's security interest remains perfected until it would become unperfected under Illinois law had no certificate of title been issued by Indiana. (For example, Illinois' certificate-of-title statute may provide that the surrender of an Illinois certificate of title in connection with the issuance of a certificate of title by another jurisdiction causes a security interest noted thereon to become unperfected.) If Lender's security interest remains perfected, it is senior to Creditor's judicial lien.

Example 8: Under the facts in Example 7, five months after Debtor applies for an Indiana certificate of title, Debtor sells the automobile to Buyer. Under subsection (e)(2), because Lender did not reperfect within the four months after the goods became covered by the Indiana certificate of title, Lender's security interest is deemed never to have been perfected against Buyer. Under section 9-317(b), Buyer is likely to take free of the security interest. Lender could have protected itself by perfecting its security interest either under Indiana's certificate-of-title statute, see section 9-311, or, if it had a right to do so under an agreement or section 9-609, by taking possession of the automobile. See section 9-313(b).

The results in Examples 7 and 8 do not depend on the fact that the original perfection was achieved by notation on a certificate of title. Subsection (d) applies regardless of the method by which a security interest is perfected under the law of another jurisdiction when the goods became covered by a certificate of title from this state.

Section 9-337 affords protection to a limited class of persons buying or acquiring a security interest in the goods while a security interest is perfected under the law of another jurisdiction but after this state has issued a clean certificate of title.

6. Deposit Accounts, Letter-of-Credit Rights, and Investment Property. Subsections (f) and (g) address changes in the jurisdiction of a bank, issuer of an uncertificated security, issuer of or nominated person under a letter of credit, securities intermediary, and commodity intermediary. The provisions are analogous to those of subsections (a) and (b).

7. Security Interests that Attach after Debtor Changes Location. In contrast to subsections (a) and (b), which address security interests that are perfected (i.e., that have attached and as to which any required perfection step has been taken) before the debtor changes its location, subsection (h) addresses security interests that attach within four months after the debtor changes its location. Under subsection (h), a filed financing statement that would have been effective to perfect a security interest in the collateral if the debtor had not changed its location is effective to perfect a security interest in collateral acquired within four months after the relocation.

Example 9: Debtor, an individual whose principal residence is in Pennsylvania, grants to Lender a security interest in Debtor's existing and after-acquired inventory. Lender perfects the security interest by filing a proper financing statement in Pennsylvania on January 2, 2014. On March 31, 2014, Debtor's principal residence is relocated to New Jersey. Upon the relocation, New Jersey law governs perfection of a security interest in Debtor's inventory. See Sections 9-301, 9-307. Under New Jersey's Section 9-316(a), Lender's security interest in Debtor's inventory on hand at the time of the relocation remains perfected for four months thereafter. Had Debtor not relocated, the financing statement filed in Pennsylvania would have been effective to perfect Lender's security interest in inventory acquired by Debtor after March 31, 2014. Accordingly, under subsection (h), the financing statement is effective to perfect Lender's security interest in inventory that Debtor acquires within the four months after Debtor's location changed.

In Example 9, Lender's security interest in the inventory acquired within the four months after Debtor's relocation will be perfected when it attaches. It will remain perfected if, before the expiration of the four-month period, the security interest is perfected under the law of New Jersey. Otherwise, the security interest will become unperfected at the end of the four-month period and will be deemed never to have been perfected as against a purchaser for value. See subsection (h)(2).

8. Collateral Acquired by New Debtor. Subsection (i) is similar to subsection (h). Whereas subsection (h) addresses security interests that attach within four months after a debtor changes its location, subsection (i) addresses security interests that attach within four months after a new debtor becomes bound as debtor by a security agreement entered into by another person. Subsection (i) also addresses collateral acquired by the new debtor before it becomes bound.

Example 10: Debtor, a Pennsylvania corporation, grants to Lender a security interest in Debtor's existing and after-acquired inventory. Lender perfects the security interest by filing a proper financing statement in Pennsylvania on January 2, 2014. On March 31, 2014, Debtor merges into Survivor, a Delaware corporation. Because Survivor is located in Delaware, Delaware law governs perfection of a security interest in Survivor's inventory. See Sections 9-301, 9-307. Under Delaware's Section 9-316(a), Lender's security interest in the inventory that Survivor acquired from Debtor remains perfected for one year after the transfer. See Comment 2. By virtue of the merger, Survivor becomes bound as debtor by Debtor's security agreement. See Section 9-203(d). As a consequence, Lender's security interest attaches to all of Survivor's inventory under Section 9-203, and Lender's collateral now includes inventory in which Debtor never had an interest. The financing statement filed in Pennsylvania against Debtor is effective under Delaware's Section 9-316(i) to perfect Lender's security interest in inventory that Survivor acquired before, and within the four months after, becoming bound as debtor by Debtor's security agreement. This is because the financing statement filed in Pennsylvania would have been effective to perfect Lender's security interest in this collateral had Debtor, rather than Survivor, acquired it.

If the financing statement is effective, Lender's security interest in the collateral that Survivor acquired before, and within four months after, Survivor became bound as debtor will be perfected upon attachment. It will remain perfected if, before the expiration of the four-month period, the security interest is perfected under Delaware law. Otherwise, the security interest will become unperfected at the end of the four-month period and will be deemed never to have been perfected as against a purchaser for value.

Section 9-325 contains special rules governing the priority of competing security interests in collateral that is transferred, by merger or otherwise, to a new debtor or other person who becomes a debtor with respect to the collateral. Section 9-326 contains special rules governing the priority of competing security interests in collateral acquired by a new debtor other than by transfer from the original debtor.

9. Agricultural Liens. This section does not apply to agricultural liens.

Example 11: Supplier holds an agricultural lien on corn. The lien arises under an Iowa statute. Supplier perfects by filing a financing statement in Iowa, where the corn is located. See section 9-302. Debtor stores the corn in Missouri. Assume the Iowa agricultural lien survives or an agricultural lien arises under Missouri law (matters that this article does not govern). Once the corn is located in Missouri, Missouri becomes the jurisdiction whose law governs perfection. See section 9-302. Thus, the agricultural lien will not be perfected unless Supplier files a financing statement in Missouri.

SubPart 3. Priority.

CASE NOTES

An unperfected security interest is subordinate to the rights of a bankruptcy trustee. Nuckolls v. Dominion Bank, 63 Bankr. 254 (Bankr. W.D. Va. 1986), aff'd, 71 Bankr. 593 (W.D. Va. 1987).

Lien creditor. - An unperfected interest is subordinated to the rights of a lien creditor, which, under the statutory definition of "lien creditor" includes a trustee in bankruptcy. In re Johnson, 179 Bankr. 800 (Bankr. E.D. Va. 1995).

Trustee in bankruptcy takes priority over party with unperfected interest. - A trustee in bankruptcy takes priority in rights to collateral over a secured party with an unperfected security interest at the date of the filing of the bankruptcy petition. Virginia Nat'l Bank v. Yale Mining Corp., 39 Bankr. 201 (Bankr. W.D. Va. 1984).

Secured claim not found. - Defendant's claim was a general unsecured claim instead of a secured claim, because the creditor's security interest was subordinate to the rights of the Trustee, who had become a lien creditor at the time of the petition filing, and that was prior to the perfection of the security interest. In re Jarvis,, 2020 Bankr. LEXIS 19 (January 2, 2020).

The existence of a syndicate financing relationship between an affiliate and parent company does not extend a security interest granted solely to the parent company to the affiliate. In re Jarvis,, 2020 Bankr. LEXIS 19 (January 2, 2020).

Interest of creditor, which properly filed financing statement in county, but neglected to file with SCC until after filing of debtors' bankruptcy petition, in the collateral, being unperfected vis-a-vis the bankruptcy trustee until post-petition, was subordinate to the interest of the bankruptcy trustee. Nuckolls v. Dominion Bank, 63 Bankr. 254 (Bankr. W.D. Va. 1986), aff'd, 71 Bankr. 593 (W.D. Va. 1987).

Subordination of conditional sales lien under former § 55-88. - Failure to record within the five-day grace period under former § 55-88, subordinated the conditional sales lien to the rights of an intervening lien creditor of the vendee. In re Markham, 254 F. Supp. 948 (W.D. Va. 1966).

Notice of interest of third party in deposit account. - If a bank may be charged with notice of the interest of a third party in a deposit account, it may not apply the account to satisfy a debt owed by the depositor. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

Did not apply to holder of garnishment lien. - Trustee's right to proceeds of sale of collateral of debtor was superior to that of other creditors holding a lien created by reason of a judgment and a related garnishment because an "account" within the meaning of § 8.9A-102(a)(2) came into existence at the moment that debtor accepted third party purchase orders for the collateral, at which time title passed to the third party buyers by operation of § 8.2-401(3)(b), and the trustee's security interest attached thereto by operation of § 8.9A-203 . The resulting right to payment and the funds used as payment were "proceeds" within the meaning of § 8.9A-102 (64) in which the trustee had an interest superior to that of the competing creditors, and § 8.9A-317 did not require a different result given these facts. Swanson v. Applied Process Tech. Int'l, LLC (In re Delta-T Corp.), 475 Bankr. 495, 2012 Bankr. LEXIS 3091 (Bankr. E.D. Va. 2012).

No duty owed subordinate interests to enforce remedies. - The priority of a perfected security interest is not affected by the fact that a secured party, in order to assist the debtor and to enhance the likelihood of satisfaction of any indebtedness, agreed not to declare the debtor in default, since a secured creditor does not owe any duty to those holding subordinate interests to proceed to enforce his remedies. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 2A-307(2) and 9-301.

2. Scope of This Section. As did former section 9-301, this section lists the classes of persons who take priority over, or take free of, an unperfected security interest. Section 9-308 explains when a security interest or agricultural lien is "perfected." A security interest that has attached (see section 9-203) but as to which a required perfection step has not been taken is "unperfected." Certain provisions have been moved from former section 9-301. The definition of "lien creditor" now appears in section 9-102, and the rules governing priority in future advances are found in section 9-323.

3. Competing Security Interests. Section 9-322 states general rules for determining priority among conflicting security interests and refers to other sections that state special rules of priority in a variety of situations. The security interests given priority under section 9-322 and the other sections to which it refers take priority in general even over a perfected security interest. A fortiori they take priority over an unperfected security interest.

4. Filed but Unattached Security Interest vs. Lien Creditor. Under former section 9-301(1)(b), a lien creditor's rights had priority over an unperfected security interest. Perfection required attachment (former section 9-303), and attachment required the giving of value (former section 9-203). It followed that, if a secured party had filed a financing statement, but the debtor had not entered into a security agreement and value had not yet been given, an intervening lien creditor whose lien arose after filing but before attachment of the security interest acquired rights that are senior to those of the secured party who later gives value. This result comported with the nemo dat concept: When the security interest attached, the collateral was already subject to the judicial lien.

On the other hand, this approach treated the first secured advance differently from all other advances, even in circumstances in which a security agreement covering the collateral had been entered into before the judicial lien attached. The special rule for future advances in former section 9-301(4) (substantially reproduced in section 9-323(b)) afforded priority to a discretionary advance made by a secured party within 45 days after the lien creditor's rights arose as long as the secured party was "perfected" when the lien creditor's lien arose - i.e., as long as the advance was not the first one and an earlier advance had been made.

Subsection (a)(2) revises former section 9-301(1)(b) and, in appropriate cases, treats the first advance the same as subsequent advances. More specifically, a judicial lien that arises after the security-agreement condition of section 9-203(b)(3) is satisfied and a financing statement is filed, but before the security interest attaches and becomes perfected, is subordinate to all advances secured by the security interest, even the first advance, except as otherwise provided in section 9-323(b). However, if the security interest becomes unperfected (e.g., because the effectiveness of the filed financing statement lapses) before the judicial lien arises, the security interest is subordinate. If a financing statement is filed but a security interest does not attach, then no priority contest arises. The lien creditor has the only enforceable claim to the property.

5. Security Interest of Consignor or Receivables Buyer vs. Lien Creditor. Section 1-201(b)(35) defines "security interest" to include the interest of most true consignors of goods and the interest of most buyers of certain receivables (accounts, chattel paper, payment intangibles, and promissory notes). A consignee of goods or a seller of accounts or chattel paper each is deemed to have rights in the collateral which a lien creditor may reach, as long as the competing security interest of the consignor or buyer is unperfected. This is so even though, as between the consignor and the debtor-consignee, the latter has only limited rights, and, as between the buyer and debtor-seller, the latter does not have any rights in the collateral. See sections 9-318 (seller) and 9-319 (consignee). Security interests arising from sales of payment intangibles and promissory notes are automatically perfected. See section 9-309. Accordingly, a subsequent judicial lien always would be subordinate to the rights of a buyer of those types of receivables.

6. Purchasers Other Than Secured Parties. Subsections (b), (c), and (d) afford priority over an unperfected security interest to certain purchasers (other than secured parties) of collateral. They derive from former sections 9-301(1)(c), 9-301(1)(d), and 9-307(2). Former section 9-301(1)(c) and (1)(d) provided that unperfected security interests are "subordinate" to the rights of certain purchasers. But, as former comment 9 suggested, the practical effect of subordination in this context is that the purchaser takes free of the security interest. To avoid any possible misinterpretation, subsections (b) and (d) of this section use the phrase "takes free."

Subsection (b) governs goods, as well as intangibles of the type whose transfer is effected by physical delivery of the representative piece of paper (tangible chattel paper, tangible documents, instruments, and security certificates). To obtain priority, a buyer must both give value and receive delivery of the collateral without knowledge of the existing security interest and before perfection. Even if the buyer gave value without knowledge and before perfection, the buyer would take subject to the security interest if perfection occurred before physical delivery of the collateral to the buyer. Subsection (c) contains a similar rule with respect to lessees of goods. Note that a lessee of goods in ordinary course of business takes free of all security interests created by the lessor, even if perfected. See section 9-321.

Normally, there will be no question when a buyer of tangible chattel paper, tangible documents, instruments, or security certificates "receives delivery" of the property. See section 1-201 (defining "delivery"). However, sometimes a buyer or lessee of goods, such as complex machinery, takes delivery of the goods in stages and completes assembly at its own location. Under those circumstances, the buyer or lessee "receives delivery" within the meaning of subsections (b) and (c) when, after an inspection of the portion of the goods remaining with the seller or lessor, it would be apparent to a potential lender to the seller or lessor that another person might have an interest in the goods.

The rule of subsection (b) obviously is not appropriate where the collateral consists of intangibles and there is no representative piece of paper whose physical delivery is the only or the customary method of transfer. Therefore, with respect to such intangibles (including accounts, electronic chattel paper, electronic documents, general intangibles, and investment property other than certificated securities), subsection (d) gives priority to any buyer who gives value without knowledge, and before perfection, of the security interest. A licensee of a general intangible takes free of an unperfected security interest in the general intangible under the same circumstances. Note that a licensee of a general intangible in ordinary course of business takes rights under a nonexclusive license free of security interests created by the licensor, even if perfected. See section 9-321.

Unless section 9-109 excludes the transaction from this article, a buyer of accounts, chattel paper, payment intangibles, or promissory notes is a "secured party" (defined in section 9-102), and subsections (b) and (d) do not determine priority of the security interest created by the sale. Rather, the priority rules generally applicable to competing security interests apply. See section 9-322.

7. Agricultural Liens. Subsections (a), (b), and (c) subordinate unperfected agricultural liens in the same manner in which they subordinate unperfected security interests.

8. Purchase-Money Security Interests. Subsection (e) derives from former section 9-301(2). It provides that, if a purchase-money security interest is perfected by filing no later than 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of buyers, lessees, or lien creditors which arise between the time the security interest attaches and the time of filing. Subsection (e) differs from former section 9-301(2) in two significant respects. First, subsection (e) protects a purchase-money security interest against all buyers and lessees, not just against transferees in bulk. Second, subsection (e) conditions this protection on filing within 20, as opposed to ten, days after delivery.

Section 9-311(b) provides that compliance with the perfection requirements of a statute or treaty described in section 9-311(a) "is equivalent to the filing of a financing statement." It follows that a person who perfects a security interest in goods covered by a certificate of title by complying with the perfection requirements of an applicable certificate-of-title statute "files a financing statement" within the meaning of subsection (e).

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Sellers of Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes. Section 1-201(b)(35) defines "security interest" to include the interest of a buyer of accounts, chattel paper, payment intangibles, or promissory notes. See also section 9-109(a) and comment 5. Subsection (a) makes explicit what was implicit, but perfectly obvious, under former article 9: The fact that a sale of an account or chattel paper gives rise to a "security interest" does not imply that the seller retains an interest in the property that has been sold. To the contrary, a seller of an account or chattel paper retains no interest whatsoever in the property to the extent that it has been sold. Subsection (a) also applies to sales of payment intangibles and promissory notes, transactions that were not covered by former article 9. Neither this article nor the definition of "security interest" in section 1-201 provides rules for distinguishing sales transactions from those that create a security interest securing an obligation.

3. Buyers of Accounts and Chattel Paper. Another aspect of sales of accounts and chattel paper also was implicit, and equally obvious, under former article 9: If the buyer's security interest is unperfected, then for purposes of determining the rights of certain third parties, the seller (debtor) is deemed to have all rights and title that the seller sold. The seller is deemed to have these rights even though, as between the parties, it has sold all its rights to the buyer. Subsection (b) makes this explicit. As a consequence of subsection (b), if the buyer's security interest is unperfected, the seller can transfer, and the creditors of the seller can reach, the account or chattel paper as if it had not been sold.

Example: Debtor sells accounts or chattel paper to Buyer-1 and retains no interest in them. Buyer-1 does not file a financing statement. Debtor then sells the same receivables to Buyer-2. Buyer-2 files a proper financing statement. Having sold the receivables to Buyer-1, Debtor would not have any rights in the collateral so as to permit Buyer-2's security (ownership) interest to attach. Nevertheless, under this section, for purposes of determining the rights of purchasers for value from Debtor, Debtor is deemed to have the rights that Debtor sold. Accordingly, Buyer-2's security interest attaches, is perfected by the filing, and, under section 9-322, is senior to Buyer-1's interest.

4. Effect of Perfection. If the security interest of a buyer of accounts or chattel paper is perfected the usual result would take effect: Transferees from and creditors of the seller could not acquire an interest in the sold accounts or chattel paper. The same result would occur if payment intangibles or promissory notes were sold, inasmuch as the buyer's security interest is automatically perfected under section 9-309.

CASE NOTES

Trustee's rights superior to those of consignor. - The trustee had the right to sell property consigned to a debtor and use the proceeds to pay creditors who file proofs of claims; the result would have been different if the consignors had filed financing statements. In re Niblett, 441 Bankr. 490, 2009 Bankr. LEXIS 3752 (Bankr. E.D. Va. 2009).

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Consignments. This section takes an approach to consignments similar to that taken by section 9-318 with respect to buyers of accounts and chattel paper. Revised section 1-201(b)(35) defines "security interest" to include the interest of a consignor of goods under many true consignments. Section 9-319(a) provides that, for purposes of determining the rights of certain third parties, the consignee is deemed to acquire all rights and title that the consignor had, if the consignor's security interest is unperfected. The consignee acquires these rights even though, as between the parties, it purchases a limited interest in the goods (as would be the case in a true consignment, under which the consignee acquires only the interest of a bailee). As a consequence of this section, creditors of the consignee can acquire judicial liens and security interests in the goods.

Insofar as creditors of the consignee are concerned, this article to a considerable extent reformulates the former law, which appeared in former sections 2-326 and 9-114, without changing the results. However, neither article 2 nor former article 9 specifically addresses the rights of nonordinary course buyers from the consignee. Former section 9-114 contained priority rules applicable to security interests in consigned goods. Under this article, the priority rules for purchase-money security interests in inventory apply to consignments. See section 9-103(d). Accordingly, a special section containing priority rules for consignments no longer is needed. Section 9-317 determines whether the rights of a judicial lien creditor are senior to the interest of the consignor, sections 9-322 and 9-324 govern competing security interests in consigned goods, and sections 9-315, 9-317, and 9-320 determine whether a buyer takes free of the consignor's interest.

The following example explains the operation of this section:

Example 1: SP-1 delivers goods to Debtor in a transaction constituting a "consignment" as defined in section 9-102. SP-1 does not file a financing statement. Debtor then grants a security interest in the goods to SP-2. SP-2 files a proper financing statement. Assuming Debtor is a mere bailee, as in a "true" consignment, Debtor would not have any rights in the collateral (beyond those of a bailee) so as to permit SP-2's security interest to attach to any greater rights. Nevertheless, under this section, for purposes of determining the rights of Debtor's creditors, Debtor is deemed to acquire SP-1's rights. Accordingly, SP-2's security interest attaches, is perfected by the filing, and, under section 9-322, is senior to SP-1's interest.

3. Effect of Perfection. Subsection (b) contains a special rule with respect to consignments that are perfected. If application of this article would result in the consignor having priority over a competing creditor, then other law determines the rights and title of the consignee.

Example 2: SP-1 delivers goods to Debtor in a transaction constituting a "consignment" as defined in section 9-102. SP-1 files a proper financing statement. Debtor then grants a security interest in the goods to SP-2. Under section 9-322, SP-1's security interest is senior to SP-2's. Subsection (b) indicates that, for purposes of determining SP-2's rights, other law determines the rights and title of the consignee. If, for example, a consignee obtains only the special property of a bailee, then SP-2's security interest would attach only to that special property.

Example 3: SP-1 obtains a security interest in all Debtor's existing and after-acquired inventory. SP-1 perfects its security interest with a proper filing. Then SP-2 delivers goods to Debtor in a transaction constituting a "consignment" as defined in section 9-102. SP-2 files a proper financing statement but does not send notification to SP-1 under section 9-324(b). Accordingly, SP-2's security interest is junior to SP-1's under section 9-322(a). Under section 9-319(a), Debtor is deemed to have the consignor's rights and title, so that SP-1's security interest attaches to SP-2's ownership interest in the goods. Thereafter, Debtor grants a security interest in the goods to SP-3, and SP-3 perfects by filing. Because SP-2's perfected security interest is senior to SP-3's under section 9-322(a), section 9-319(b) applies: Other law determines Debtor's rights and title to the goods insofar as SP-3 is concerned, and SP-3's security interest attaches to those rights.

CASE NOTES

Effect of Federal Aviation Act recordation procedure on certain State laws. - While Congress has the power to legislate in the field of aircraft conveyancing and to preempt State laws that would otherwise apply, Congress did not intend by adoption of the recordation procedure of the Federal Aviation Act, 49 U.S.C. § 1403, to displace State laws that would otherwise govern priorities of lien and title interests in aircraft. Haynes v. GECC, 432 F. Supp. 763 (W.D. Va. 1977), aff'd, 582 F.2d 869 (4th Cir. 1978).

Where an aircraft was purchased in the ordinary course of business from a person in the business of selling goods of that kind, and the purchaser was without actual knowledge that the sale to him was in violation of the ownership rights or the security interest of a lienholder, the purchaser's ownership interest was superior to that of the lienholder even though the lienholder had recorded his security interest in compliance with the Federal Aviation Act prior to the purchase. Haynes v. GECC, 432 F. Supp. 763 (W.D. Va. 1977), aff'd, 582 F.2d 869 (4th Cir. 1978).

Subsection (1) of former § 8.9-307 (see now this section) was inapplicable and the second purchaser of a mobile home took subject to bank's security interest where the security interest was created not by the seller but by the initial purchaser. First Am. Bank v. Hunning, 218 Va. 530 , 238 S.E.2d 799 (1977).

Effect of transfer on secured indebtedness. - Consumers' goods continue to be subject to security interest in the hands of the transferee from purchase. If the seller acquired knowledge of the transaction at a time when it could have asserted its security interest in the property and failed to take reasonable steps to protect its security, the indebtedness secured thereby should be discharged upon purchaser's bankruptcy. Bennett v. W.T. Grant Co., 481 F.2d 664 (4th Cir. 1973).

Where an automobile dealer sold an automobile to a leasing company at a discount, and where the dealership and the leasing company were owned by the same person, the transaction was, nevertheless, in the ordinary course of business and extinguished a floor-plan financier's security interest in the automobile. GMAC v. Frank Meador Leasing, Inc., 6 Bankr. 910 (Bankr. W.D. Va. 1980).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-307.

2. Scope of This Section. This section states when buyers of goods take free of a security interest even though perfected. Of course, a buyer who takes free of a perfected security interest takes free of an unperfected one. Section 9-317 should be consulted to determine what purchasers, in addition to the buyers covered in this section, take free of an unperfected security interest. Article 2 states general rules on purchase of goods from a seller with defective or voidable title (section 2-403).

3. Buyers in Ordinary Course. Subsection (a) derives from former section 9-307(1). The definition of "buyer in ordinary course of business" in section 1-201 restricts its application to buyers "from a person, other than a pawnbroker, in the business of selling goods of that kind." Thus subsection (a) applies primarily to inventory collateral. The subsection further excludes from its operation buyers of "farm products" (defined in section 9-102) from a person engaged in farming operations. The buyer in ordinary course of business is defined as one who buys goods "in good faith, without knowledge that the sale violates the rights of another person and in the ordinary course." Subsection (a) provides that such a buyer takes free of a security interest, even though perfected, and even though the buyer knows the security interest exists. Reading the definition together with the rule of law results in the buyer's taking free if the buyer merely knows that a security interest covers the goods but taking subject if the buyer knows, in addition, that the sale violates a term in an agreement with the secured party.

As did former section 9-307(1), subsection (a) applies only to security interests created by the seller of the goods to the buyer in ordinary course. However, under certain circumstances a buyer in ordinary course who buys goods that were encumbered with a security interest created by a person other than the seller may take free of the security interest, as Example 2 explains. See also comment 6, below.

Example 1: Manufacturer, who is in the business of manufacturing appliances, owns manufacturing equipment subject to a perfected security interest in favor of Lender. Manufacturer sells the equipment to Dealer, who is in the business of buying and selling used equipment. Buyer buys the equipment from Dealer. Even if Buyer qualifies as a buyer in the ordinary course of business, Buyer does not take free of Lender's security interest under subsection (a), because Dealer did not create the security interest; Manufacturer did.

Example 2: Manufacturer, who is in the business of manufacturing appliances, owns manufacturing equipment subject to a perfected security interest in favor of Lender. Manufacturer sells the equipment to Dealer, who is in the business of buying and selling used equipment. Lender learns of the sale but does nothing to assert its security interest. Buyer buys the equipment from Dealer. Inasmuch as Lender's acquiescence constitutes an "entrusting" of the goods to Dealer within the meaning of section 2-403(3) Buyer takes free of Lender's security interest under section 2-403(2) if Buyer qualifies as a buyer in ordinary course of business.

4. Buyers of Farm Products. This section does not enable a buyer of farm products to take free of a security interest created by the seller, even if the buyer is a buyer in ordinary course of business. However, a buyer of farm products may take free of a security interest under section 1324 of the Food Security Act of 1985, 7 U.S.C. section 1631.

5. Buyers of Consumer Goods. Subsection (b), which derives from former section 9-307(2), deals with buyers of collateral that the debtor-seller holds as "consumer goods" (defined in section 9-102). Under section 9-309(1), a purchase-money interest in consumer goods, except goods that are subject to a statute or treaty described in section 9-311(a) (such as automobiles that are subject to a certificate-of-title statute), is perfected automatically upon attachment. There is no need to file to perfect. Under subsection (b) a buyer of consumer goods takes free of a security interest, even though perfected, if the buyer buys (1) without knowledge of the security interest, (2) for value, (3) primarily for the buyer's own personal, family, or household purposes, and (4) before a financing statement is filed.

As to purchase-money security interests which are perfected without filing under section 9-309(1): A secured party may file a financing statement, although filing is not required for perfection. If the secured party does file, all buyers take subject to the security interest. If the secured party does not file, a buyer who meets the qualifications stated in the preceding paragraph takes free of the security interest.

As to security interests for which a perfection step is required: This category includes all non-purchase-money security interests, and all security interests, whether or not purchase-money, in goods subject to a statute or treaty described in section 9-311(a), such as automobiles covered by a certificate-of-title statute. As long as the required perfection step has not been taken and the security interest remains unperfected, not only the buyers described in subsection (b) but also the purchasers described in section 9-317 will take free of the security interest. After a financing statement has been filed or the perfection requirements of the applicable certificate-of-title statute have been complied with (compliance is the equivalent of filing a financing statement; see section 9-311(b)), all subsequent buyers, under the rule of subsection (b), are subject to the security interest.

The rights of a buyer under subsection (b) turn on whether a financing statement has been filed against consumer goods. Occasionally, a debtor changes his or her location after a filing is made. Subsection (c), which derives from former section 9-103(1)(d)(iii), deals with the continued effectiveness of the filing under those circumstances. It adopts the rules of section 9-316(a) and (b). These rules are explained in the comments to that section.

6. Authorized Dispositions. The limitations that subsections (a) and (b) impose on the persons who may take free of a security interest apply of course only to unauthorized sales by the debtor. If the secured party authorized the sale in an express agreement or otherwise, the buyer takes free under section 9-315(a)(1) without regard to the limitations of this section. (That section also states the right of a secured party to the proceeds of a sale, authorized or unauthorized.) Moreover, the buyer also takes free if the secured party waived or otherwise is precluded from asserting its security interest against the buyer. See section 1-103.

7. Oil, Gas, and Other Minerals. Under subsection (d), a buyer in ordinary course of business of minerals at the wellhead or minehead or after extraction takes free of a security interest created by the seller. Specifically, it provides that qualified buyers take free not only of article 9 security interests but also of interests "arising out of an encumbrance." As defined in section 9-102, the term "encumbrance" means "a right, other than an ownership interest, in real property." Thus, to the extent that a mortgage encumbers minerals not only before but also after extraction, subsection (d) enables a buyer in ordinary course of the minerals to take free of the mortgage. This subsection does not, however, enable these buyers to take free of interests arising out of ownership interests in the real property. This issue is significant only in a minority of states. Several of them have adopted special statutes and nonuniform amendments to article 9 to provide special protections to mineral owners, whose interests often are highly fractionalized in the case of oil and gas. See Terry I. Cross, Oil and Gas Product Liens - Statutory Security Interests for Producers and Royalty Owners Under the Statutes of Kansas, New Mexico, Oklahoma, Texas and Wyoming, 50 Consumer Fin. L. Q. Rep. 418 (1996). Inasmuch as a complete resolution of the issue would require the addition of complex provisions to this article, and there are good reasons to believe that a uniform solution would not be feasible, this article leaves its resolution to other legislation.

8. Possessory Security Interests. Subsection (e) is new. It rejects the holding of Tanbro Fabrics Corp. v. Deering Milliken, Inc., 350 N.E.2d 590 (N.Y. 1976) and, together with section 9-317(b), prevents a buyer of goods collateral from taking free of a security interest if the collateral is in the possession of the secured party. "The secured party" referred in subsection (e) is the holder of the security interest referred to in subsection (a) or (b). Section 9-313 determines whether a secured party is in possession for purposes of this section. Under some circumstances, section 9-313 provides that a secured party is in possession of collateral even if the collateral is in the physical possession of a third party.

OFFICIAL COMMENT

Comment. - 1. Source. Derived from sections 2A-103(1)(o) and 2A-307(3).

2. Licensee in Ordinary Course. Like the analogous rules in section 9-320(a) with respect to buyers in ordinary course and subsection (c) with respect to lessees in ordinary course, the new rule in subsection (b) reflects the expectations of the parties and the marketplace: A licensee under a nonexclusive license takes subject to a security interest unless the secured party authorizes the license free of the security interest or other, controlling law such as that of this section (protecting ordinary-course licensees) dictates a contrary result. See sections 9-201 and 9-315. The definition of "licensee in ordinary course of business" in subsection (a) is modeled upon that of "buyer in ordinary course of business."

3. Lessee in Ordinary Course. Subsection (c) contains the rule formerly found in section 2A-307(3). The rule works in the same way as that of section 9-320(a).

CASE NOTES

Priority is determined in the order of filing where conflicting security interests are claimed in the same collateral and both are perfected by filing. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

"First in time, first in right." - Under the "first in time, first in right" filing theory, knowledge is not generally relevant in determining priority of liens. Bryant v. Secretary, United States Dep't of Agric., 227 Bankr. 89 (W.D. Va. 1998), aff'd, 181 F.3d 86 (4th Cir. 1999).

Notice of prior security interest not relevant in determining priorities. - Whether a secured party had actual notice of a prior security interest is not a relevant consideration in determining priorities since subsection (5) contains no provision establishing lack of notice as a prerequisite for its operation. Grossmann v. Saunders, 237 Va. 113 , 376 S.E.2d 66 (1989).

Although lack of notice is not a prerequisite to the operation of former § 8.9-312 (5), § 8.1-203 [see now 8.1A-304] provides that every contract or duty within this act imposes an obligation of good faith in its performance or enforcement and accordingly, allegations and proof of a leading on, bad faith or inequitable conduct on the part of a secured party may affect the priorities established under former subsection (5) of § 8.9-312 (see now this section) by estopping the assertion of a priority. Grossmann v. Saunders, 237 Va. 113 , 376 S.E.2d 66 (1989).

An unperfected security interest is only inferior to certain specific interests, such as that of an intervening judgment lien creditor without notice and is, therefore, not inferior to all interests; thus, a creditor with an unperfected security interest has a valid lien against the debtor enforceable in a nonbankruptcy forum. Felmey v. HFC, 9 Bankr. 331 (Bankr. E.D. Va. 1981).

Notice of interest of third party in deposit account. - If a bank may be charged with notice of the interest of a third party in a deposit account, it may not apply the account to satisfy a debt owed by the depositor. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

No duty to subordinate interests to enforce remedies. - The priority of a perfected security interest is not affected by the fact that a secured party, in order to assist the debtor and to enhance the likelihood of satisfaction of any indebtedness, agreed not to declare the debtor in default, since a secured creditor does not owe any duty to those holding subordinate interests to proceed to enforce his remedies. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

Lack of interest requiring filing of financing statement. - A general contractor which entered into a contract with an electrical contractor for supplies and services in construction of a school building did not have an interest in the electrical supplies stored at the job site whose protection would have required it, under former § 8.9-312 (5), to file a financing statement. Thus, under former § 8.9-102 (1) (a), former Title 8.9 would not be applicable. Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844 , 263 S.E.2d 408 (1980).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-312(5), (6).

2. Scope of This Section. In a variety of situations, two or more people may claim a security interest in the same collateral. This section states general rules of priority among conflicting security interests. As subsection (f) provides, the general rules in subsections (a) through (e) are subject to the rule in subsection (g) governing perfected agricultural liens and to the other rules in this part of this article. Rules that override this section include those applicable to purchase-money security interests (section 9-324) and those qualifying for special priority in particular types of collateral. See, e.g., section 9-327 (deposit accounts); section 9-328 (investment property); section 9-329 (letter-of-credit rights); section 9-330 (chattel paper and instruments); and section 9-334 (fixtures). In addition, the general rules of sections (a) through (e) are subject to priority rules governing security interests arising under articles 2, 2A, 4, and 5.

3. General Rules. Subsection (a) contains three general rules. Subsection (a)(1) governs the priority of competing perfected security interests. Subsection (a)(2) governs the priority of competing security interests if one is perfected and the other is not. Subsection (a)(3) governs the priority of competing unperfected security interests. The rules may be regarded as adaptations of the idea, deeply rooted at common law, of a race of diligence among creditors. The first two rules are based on precedence in the time as of which the competing secured parties either filed their financing statements or obtained perfected security interests. Under subsection (a)(1), the first secured party who files or perfects has priority. Under subsection (a)(2), which is new, a perfected security interest has priority over an unperfected one. Under subsection (a)(3), if both security interests are unperfected, the first to attach has priority. Note that section 9-709(b) may affect the application of subsection (a) to a filing that occurred before the effective date of this article (July 1, 2001) and which would be ineffective to perfect a security interest under former article 9 but effective under this article.

4. Competing Perfected Security Interests. When there is more than one perfected security interest, the security interests rank according to priority in time of filing or perfection. "Filing," of course, refers to the filing of an effective financing statement. "Perfection" refers to the acquisition of a perfected security interest, i.e., one that has attached and as to which any required perfection step has been taken. See sections 9-308 and 9-309.

Example 1: On February 1, A files a financing statement covering a certain item of Debtor's equipment. On March 1, B files a financing statement covering the same equipment. On April 1, B makes a loan to Debtor and obtains a security interest in the equipment. On May 1, A makes a loan to Debtor and obtains a security interest in the same collateral. A has priority even though B's loan was made earlier and was perfected when made. It makes no difference whether A knew of B's security interest when A made its advance.

The problem stated in Example 1 is peculiar to a notice-filing system under which filing may occur before the security interest attaches (see section 9-502). The justification for determining priority by order of filing lies in the necessity of protecting the filing system - that is, of allowing the first secured party who has filed to make subsequent advances without each time having to check for subsequent filings as a condition of protection. Note, however, that this first-to-file protection is not absolute. For example, section 9-324 affords priority to certain purchase-money security interests, even if a competing secured party was the first to file or perfect.

Under a notice-filing system, a filed financing statement indicates to third parties that a person may have a security interest in the collateral indicated. With further inquiry, they may discover the complete state of affairs. When a financing statement that is ineffective when filed becomes effective thereafter, the policy underlying the notice-filing system determines the "time of filing" for purposes of subsection (a)(1). For example, the unauthorized filing of an otherwise sufficient initial financing statement becomes authorized, and the financing statement becomes effective, upon the debtor's post-filing authorization or ratification of the filing. See Section 9- 509, Comment 3. Because the notice value of the financing statement is independent of the timing of authorization or ratification, the time of the unauthorized filing is the "time of filing" for purposes of subsection (a)(1). The same policy applies to the other priority rules in this part.

Example 2: A and B make non-purchase-money advances secured by the same collateral. The collateral is in Debtor's possession, and neither security interest is perfected when the second advance is made. Whichever secured party first perfects its security interest (by taking possession of the collateral or by filing) takes priority. It makes no difference whether that secured party knows of the other security interest at the time it perfects its own.

The rule of subsection (a)(1), affording priority to the first to file or perfect, applies to security interests that are perfected by any method, including temporarily (section 9-312) or upon attachment (section 9-309), even though there may be no notice to creditors or subsequent purchasers and notwithstanding any common-law rule to the contrary. The form of the claim to priority, i.e., filing or perfection, may shift from time to time, and the rank will be based on the first filing or perfection as long as there is no intervening period without filing or perfection. See section 9-308(c).

Example 3: On October 1, A acquires a temporarily perfected (20-day) security interest, unfiled, in a tangible negotiable document in the debtor's possession under section 9-312(e). On October 5, B files and thereby perfects a security interest that previously had attached to the same document. On October 10, A files. A has priority, even after the 20-day period expires, regardless of whether A knows of B's security interest when A files. A was the first to perfect and maintained continuous perfection or filing since the start of the 20-day period. However, the perfection of A's security interest extends only "to the extent it arises for new value given." To the extent A's security interest secures advances made by A beyond the 20-day period, its security interest would be subordinate to B's, inasmuch as B was the first to file.

In general, the rule in subsection (a)(1) does not distinguish among various advances made by a secured party. The priority of every advance dates from the earlier of filing or perfection. However, in rare instances, the priority of an advance dates from the time the advance is made. See example 3 and section 9-323.

5. Priority in After-Acquired Property. The application of the priority rules to after-acquired property must be considered separately for each item of collateral. Priority does not depend only on time of perfection but may also be based on priority in filing before perfection.

Example 4: On February 1, A makes advances to Debtor under a security agreement covering "all Debtor's machinery, both existing and after-acquired." A promptly files a financing statement. On April 1, B takes a security interest in all Debtor's machinery, existing and after-acquired, to secure an outstanding loan. The following day, B files a financing statement. On May 1, Debtor acquires a new machine. When Debtor acquires rights in the new machine, both A and B acquire security interests in the machine simultaneously. Both security interests are perfected simultaneously. However, A has priority because A filed before B.

When after-acquired collateral is encumbered by more than one security interest, one of the security interests often is a purchase-money security interest that is entitled to special priority under section 9-324.

6. Priority in Proceeds: General Rule. Subsection (b)(1) follows former section 9-312(6). It provides that the baseline rules of subsection (a) apply generally to priority conflicts in proceeds except where otherwise provided (e.g., as in subsections (c) through (e)). Under section 9-203, attachment cannot occur (and therefore, under section 9-308, perfection cannot occur) as to particular collateral until the collateral itself comes into existence and the debtor has rights in it. Thus, a security interest in proceeds of original collateral does not attach and is not perfected until the proceeds come into existence and the debtor acquires rights in them.

Example 5: On April 1, Debtor authenticates a security agreement granting to A a security interest in all Debtor's existing and after-acquired inventory. The same day, A files a financing statement covering inventory. On May 1, Debtor authenticates a security agreement granting B a security interest in all Debtor's existing and future accounts. On June 1, Debtor sells inventory to a customer on 30-day unsecured credit. When Debtor acquires the account, B's security interest attaches to it and is perfected by B's financing statement. At the very same time, A's security interest attaches to the account as proceeds of the inventory and is automatically perfected. See section 9-315. Under subsection (b) of this section, for purposes of determining A's priority in the account, the time of filing as to the original collateral (April 1, as to inventory) is also the time of filing as to proceeds (account). Accordingly, A's security interest in the account has priority over B's. Of course, had B filed its financing statement before A filed (e.g., on March 1), then B would have priority in the accounts.

Section 9-324 governs the extent to which a special purchase-money priority in goods or software carries over into the proceeds of the original collateral.

7. Priority in Proceeds: Special Rules. Subsections (c), (d), and (e), which are new, provide additional priority rules for proceeds of collateral in situations where the temporal (first-in-time) rules of subsection (a)(1) are not appropriate. These new provisions distinguish what these comments refer to as "non-filing collateral" from what they call "filing collateral." As used in these comments, non-filing collateral is collateral of a type for which perfection may be achieved by a method other than filing (possession or control, mainly) and for which secured parties who so perfect generally do not expect or need to conduct a filing search. More specifically, non-filing collateral is chattel paper, deposit accounts, negotiable documents, instruments, investment property, and letter-of-credit rights. Other collateral - accounts, commercial tort claims, general intangibles, goods, nonnegotiable documents, and payment intangibles - is filing collateral.

8. Proceeds of Non-Filing Collateral: Non-Temporal Priority. Subsection (c)(2) provides a baseline priority rule for proceeds of non-filing collateral which applies if the secured party has taken the steps required for non-temporal priority over a conflicting security interest in non-filing collateral (e.g., control, in the case of deposit accounts, letter-of-credit rights, investment property, and in some cases, electronic negotiable documents, section 9-331). This rule determines priority in proceeds of non-filing collateral whether or not there exists an actual conflicting security interest in the original non-filing collateral. Under subsection (c)(2), the priority in the original collateral continues in proceeds if the security interest in proceeds is perfected and the proceeds are cash proceeds or non-filing proceeds "of the same type" as the original collateral. As used in subsection (c)(2), "type" means a type of collateral defined in the Uniform Commercial Code and should be read broadly. For example, a security is "of the same type" as a security entitlement (i.e., investment property), and a promissory note is "of the same type" as a draft (i.e., an instrument).

Example 6: SP-1 perfects its security interest in investment property by filing. SP-2 perfects subsequently by taking control of a certificated security. Debtor receives cash proceeds of the security (e.g., dividends deposited into Debtor's deposit account). If the first-to-file-or-perfect rule of subsection (a)(1) were applied, SP-1's security interest in the cash proceeds would be senior, although SP-2's security interest continues perfected under section 9-315 beyond the 20-day period of automatic perfection. This was the result under former article 9. Under subsection (c), however, SP-2's security interest is senior.

Note that a different result would obtain in Example 6 (i.e., SP-1's security interest would be senior) if SP-1 were to obtain control of the deposit-account proceeds. This is so because subsection (c) is subject to subsection (f), which in turn provides that the priority rules under subsections (a) through (e) are subject to "the other provisions of this part." One of those "other provisions" is section 9-327, which affords priority to a security interest perfected by control. See section 9-327(1).

Example 7: SP-1 perfects its security interest in investment property by filing. SP-2 perfects subsequently by taking control of a certificated security. Debtor receives proceeds of the security consisting of a new certificated security issued as a stock dividend on the original collateral. Although the new security is of the same type as the original collateral (i.e., investment property), once the 20-day period of automatic perfection expires (see section 9-315(d)), SP-2's security interest is unperfected. (SP-2 has not filed or taken delivery or control, and no temporary-perfection rule applies.) Consequently, once the 20-day period expires, subsection (c) does not confer priority, and, under subsection (a)(2), SP-1's security interest in the security is senior. This was the result under former article 9.

Example 8: SP-1 perfects its security interest in investment property by filing. SP-2 perfects subsequently by taking control of a certificated security and also by filing against investment property. Debtor receives proceeds of the security consisting of a new certificated security issued as a stock dividend of the collateral. Because the new security is of the same type as the original collateral (i.e., investment property) and (unlike example 7) SP-2's security interest is perfected by filing, SP-2's security interest is senior under subsection (c). If the new security were redeemed by the issuer upon surrender and yet another security were received by Debtor, SP-2's security interest would continue to enjoy priority under subsection (c). The new security would be proceeds of proceeds.

Example 9: SP-1 perfects its security investment property in instruments by filing. SP-2 subsequently perfects its security interest in investment property by taking control of a certificated security and also by filing against investment property. Debtor receives proceeds of the security consisting of a dividend check that it deposits to a deposit account. Because the check and the deposit account are cash proceeds, SP-1's and SP-2's security interests in the cash proceeds are perfected under section 9-315 beyond the 20-day period of automatic perfection. However, SP-2's security interest is senior under subsection (c).

Example 10: SP-1 perfects its security interest in investment property by filing. SP-2 perfects subsequently by taking control of a certificated security and also by filing against investment property. Debtor receives an instrument as proceeds of the security. (Assume that the instrument is not cash proceeds.) Because the instrument is not of the same type as the original collateral (i.e., investment property), SP-2's security interest, although perfected by filing, does not achieve priority under subsection (c). Under the first-to-file-or-perfect rule of subsection (a)(1), SP-1's security interest in the proceeds is senior.

The proceeds of proceeds are themselves proceeds. See section 9-102 (defining "proceeds" and "collateral"). Sometimes competing security interests arise in proceeds that are several generations removed from the original collateral. As the following example explains, the applicability of subsection (c) may turn on the nature of the intervening proceeds.

Example 11: SP-1 perfects its security interest in Debtor's deposit account by obtaining control. Thereafter, SP-2 files against inventory, (presumably) searches, finds no indication of a conflicting security interest, and advances against Debtor's existing and after-acquired inventory. Debtor uses funds from the deposit account to purchase inventory, which SP-1 can trace as identifiable proceeds of its security interest in Debtor's deposit account, and which SP-2 claims as original collateral. The inventory is sold and the proceeds deposited into another deposit account, as to which SP-1 has not obtained control. Subsection (c) does not govern priority in this other deposit account. This deposit account is cash proceeds and is also the same type of collateral as SP-1's original collateral, as required by subsections (c)(2)(A) and (B). However, SP-1's security interest does not satisfy subsection (c)(2)(C) because the inventory proceeds, which intervened between the original deposit account and the deposit account constituting the proceeds at issue, are not cash proceeds, proceeds of the same type as the collateral (original deposit account), or an account relating to the collateral. Stated otherwise, once proceeds other than cash proceeds, proceeds of the same type as the original collateral, or an account relating to the original collateral intervene in the chain of proceeds, priority under subsection (c) is thereafter unavailable. The special priority rule in subsection (d) also is inapplicable to this case. See comment 9, example 13, below. Instead, the general first-to-file-or-perfect rule of subsections (a) and (b) apply. Under that rule, SP-1 has priority unless its security interest in the inventory proceeds became unperfected under section 9-315(d). Had SP-2 filed against inventory before SP-1 obtained control of the original deposit account, then SP-2 would have had priority even if SP-1's security interest in the inventory proceeds remained perfected.

If two security interests in the same original collateral are entitled to priority in an item of proceeds under subsection (c)(2), the security interest having priority in the original collateral has priority in the proceeds.

9. Proceeds of Nonfiling Collateral: Special Temporal Priority. Under subsections (d) and (e), if a security interest in nonfiling collateral is perfected by a method other than filing (e.g., control or possession), it does not retain its priority over a conflicting security interest in proceeds that are filing collateral. Moreover, it is not entitled to priority in proceeds under the first-to-file-or-perfect rule of subsections (a)(1) and (b). Instead, under subsection (d), priority is determined by a new first-to-file rule.

Example 12: SP-1 perfects its security interest in Debtor's deposit account by obtaining control. Thereafter, SP-2 files against equipment, (presumably) searches, finds no indication of a conflicting security interest, and advances against Debtor's equipment. SP-1 then files against Debtor's equipment. Debtor uses funds from the deposit account to purchase equipment, which SP-1 can trace as proceeds of its security interest in Debtor's deposit account. If the first-to-file-or-perfect rule were applied, SP-1's security interest would be senior under subsections (a)(1) and (b), because it was the first to perfect in the original collateral and there was no period during which its security interest was unperfected. Under subsection (d), however, SP-2's security interest would be senior because it filed first. This corresponds with the likely expectations of the parties.

Note that under subsection (e), the first-to-file rule of subsection (d) applies only if the proceeds in question are other than nonfiling collateral (i.e., if the proceeds are filing collateral). If the proceeds are nonfiling collateral, either the first-to-file-or-perfect rule under subsections (a) and (b) or the nontemporal priority rule in subsection (c) would apply, depending on the facts.

Example 13: SP-1 perfects its security interest in Debtor's deposit account by obtaining control. Thereafter, SP-2 files against inventory, (presumably) searches, finds no indication of a conflicting security interest, and advances against Debtor's existing and after-acquired inventory. Debtor uses funds from the deposit account to purchase inventory, which SP-1 can trace as identifiable proceeds of its security interest in Debtor's deposit account, and which SP-2 claims as original collateral. The inventory is sold and the proceeds deposited into another deposit account, as to which SP-1 has not obtained control. As discussed above in comment 8, example 11, subsection (c) does not govern priority in this deposit account. Subsection (d) also does not govern, because the proceeds at issue (the deposit account) are cash proceeds. See subsection (e). Rather, the general rules of subsections (a) and (b) govern.

10. Priority in Supporting Obligations. Under subsections (b)(2) and (c)(1), a security interest having priority in collateral also has priority in a supporting obligation for that collateral. However, the rules in these subsections are subject to the special rule in section 9-329 governing the priority of security interests in a letter-of-credit right. See subsection (f). Under section 9-329, a secured party's failure to obtain control (section 9-107) of a letter-of-credit right that serves as supporting collateral leaves its security interest exposed to a priming interest of a party who does take control.

11. Unperfected Security Interests. Under subsection (a)(3), if conflicting security interests are unperfected, the first to attach has priority. This rule may be of merely theoretical interest, inasmuch as it is hard to imagine a situation where the case would come into litigation without either secured party's having perfected its security interest. If neither security interest had been perfected at the time of the filing of a petition in bankruptcy, ordinarily neither would be good against the trustee in bankruptcy under the Bankruptcy Code.

12. Agricultural Liens. Statutes other than this article may purport to grant priority to an agricultural lien as against a conflicting security interest or agricultural lien. Under subsection (g), if another statute grants priority to an agricultural lien, the agricultural lien has priority only if the same statute creates the agricultural lien and the agricultural lien is perfected. Otherwise, subsection (a) applies the same priority rules to an agricultural lien as to a security interest, regardless of whether the agricultural lien conflicts with another agricultural lien or with a security interest.

Inasmuch as no agricultural lien on proceeds arises under this article, subsections (b) through (e) do not apply to proceeds of agricultural liens. However, if an agricultural lien has priority under subsection (g) and the statute creating the agricultural lien gives the secured party a lien on proceeds of the collateral subject to the lien, a court should apply the principle of subsection (g) and award priority in the proceeds to the holder of the perfected agricultural lien.

CASE NOTES

Because future advances enjoy same priority as original security interest, if a loan made in 1996 was a future advance on a 1992 security agreement, it has priority over loans made after the initial security agreement but before 1996. Blair v. Crestar Bank (In re Brice), 225 Bankr. 124 (W.D. Va. 1998), aff'd, 188 F.3d 576 (4th Cir. 1999) (decided under prior law).

Inapplicability of § 55-58.2. - Language of § 55-58.2 concerning future advances under a line of credit secured by real property would not be applied to a case governed by former § 8.9-312(7) by employment of the doctrine of pari materia; this doctrine did not apply, as it requires that the statute being interpreted must be ambiguous, which former § 8.9-312(7) is not, and further requires that the statutes being compared relate to the same thing or have a common purpose, which former § 55-58.2 and former § 8.9-312(7) do not. In re Enfolinc, Inc., 233 Bankr. 351 (Bankr. E.D. Va. 1999) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 2A-307(4), 9-301(4), 9-307(3), and 9-312(7).

2. Scope of This Section. A security agreement may provide that collateral secures future advances. See section 9-204(c). This section collects all of the special rules dealing with the priority of advances made by a secured party after a third party acquires an interest in the collateral. Subsection (a) applies when the third party is a competing secured party. It replaces and clarifies former section 9-312(7). Subsection (b) deals with lien creditors and replaces former section 9-301(4). Subsections (d) and (e) deal with buyers and replace former section 9-307(3). Subsections (f) and (g) deal with lessees and replace former section 2A-307(4).

3. Competing Security Interests. Under a proper reading of the first-to-file-or-perfect rule of section 9-322(a)(1) (and former section 9-312(5)), it is abundantly clear that the time when an advance is made plays no role in determining priorities among conflicting security interests except when a financing statement was not filed and the advance is the giving of value as the last step for attachment and perfection. Thus, a secured party takes subject to all advances secured by a competing security interest having priority under section 9-322(a)(1). This result generally obtains regardless of how the competing security interest is perfected and regardless of whether the advances are made "pursuant to commitment" (section 9-102). Subsection (a) of this section states the only other instance when the time of an advance figures in the priority scheme in section 9-322: When the security interest is perfected only automatically under section 9-309 or temporarily under section 9-312(e), (f), or (g), and the advance is not made pursuant to a commitment entered into while the security interest was perfected by another method. Thus, an advance has priority from the date it is made only in the rare case in which it is made without commitment and while the security interest is perfected only temporarily under section 9-312.

The new formulation in subsection (a) clarifies the result when the initial advance is paid and a new ("future") advance is made subsequently. Under former section 9-312(7), the priority of the new advance turned on whether it was "made while a security interest is perfected." This section resolves any ambiguity by omitting the quoted phrase.

Example 1: On February 1, A makes an advance secured by machinery in the debtor's possession and files a financing statement. On March 1, B makes an advance secured by the same machinery and files a financing statement. On April 1, A makes a further advance, under the original security agreement, against the same machinery. A was the first to file and so, under the first-to-file-or-perfect rule of section 9-322(a)(1), A's security interest has priority over B's, both as to the February 1 and as to the April 1 advance. It makes no difference whether A knows of B's intervening advance when A makes the second advance. Note that, as long as A was the first to file or perfect, A would have priority with respect to both advances if either A or B had perfected by taking possession of the collateral. Likewise, A would have priority if A's April 1 advance was not made under the original agreement with the debtor, but was under a new agreement.

Example 2: On October 1, A acquires a temporarily perfected (20-day) security interest, unfiled, in a tangible negotiable document in the debtor's possession under section 9-312(e) or (f). The security interest secures an advance made on that day as well as future advances. On October 5, B files and thereby perfects a security interest that previously had attached to the same document. On October 8, A makes an additional advance. On October 10, A files. Under section 9-322(a)(1), because A was the first to perfect and maintained continuous perfection or filing since the start of the 20-day period, A has priority, even after the 20-day period expires. See section 9-322, comment 4, example 3. However, under this section, for purposes of section 9-322(a)(1), to the extent A's security interest secures the October 8 advance, the security interest was perfected on October 8. Inasmuch as B perfected on October 5, B has priority over the October 8 advance.

The rule in subsection (a) is more liberal toward the priority of future advances than the corresponding rules applicable to intervening lien creditors (subsection (b)), buyers (subsections (d) and (e)), and lessees (subsections (f) and (g)).

4. Competing Lien Creditors. Subsection (b) replaces former section 9-301(4) and addresses the rights of a "lien creditor," as defined in section 9-102. Under section 9-317(a)(2), a security interest is senior to the rights of a person who becomes a lien creditor, unless the person becomes a lien creditor before the security interest is perfected and before a financing statement covering the collateral is filed. Subsection (b) of this section provides that a security interest is subordinate to those rights to the extent that the specified circumstances occur. Subsection (b) does not elevate the priority of a security interest that is subordinate to the rights of a lien creditor under Section 9-317(a)(2); it only subordinates.

As under former section 9-301(4), a secured party's knowledge does not cut short the 45-day period during which future advances can achieve priority over an intervening lien creditor's interest. Rather, because of the impact of the rule in subsection (b) on the question whether the security interest for future advances is "protected" under section 6323(c)(2) and (d) of the Internal Revenue Code as amended by the Federal Tax Lien Act of 1966, the priority of the security interest for future advances over a lien creditor is made absolute for 45 days regardless of knowledge of the secured party concerning the lien. If, however, the advance is made after the 45 days, the advance will not have priority unless it was made or committed without knowledge of the lien.

5. Sales of Receivables; Consignments. Subsections (a) and (b) do not apply to outright sales of accounts, chattel paper, payment intangibles, or promissory notes, nor do they apply to consignments.

6. Competing Buyers and Lessees. Under subsections (d) and (e), a buyer will not take subject to a security interest to the extent it secures advances made after the secured party has knowledge that the buyer has purchased the collateral or more than 45 days after the purchase unless the advances were made pursuant to a commitment entered into before the expiration of the 45-day period and without knowledge of the purchase. Subsections (f) and (g) provide an analogous rule for lessees. Of course, a buyer in ordinary course who takes free of the security interest under section 9-320 and a lessee in ordinary course who takes free under section 9-321 are not subject to any future advances. Subsections (d) and (e) replace former section 9-307(3), and subsections (f) and (g) replace former section 2A-307(4). No change in meaning is intended.

CASE NOTES

Applied only to purchase money security interests. - This section did not operate to afford a priority interest in certain steel to claimants holding a judgment and garnishment lien that was higher than the right of a trustee in bankruptcy holding a secured interest in all of debtor's property because § 8.9A-324 addressed inventory but only to provide a special priority for creditors with a purchase money security interest therein and claimants were not within that class of creditors. Swanson v. Applied Process Tech. Int'l, LLC (In re Delta-T Corp.), 475 Bankr. 495, 2012 Bankr. LEXIS 3091 (Bankr. E.D. Va. 2012).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-312(3) and (4).

2. Priority of Purchase-Money Security Interests. This section contains the priority rules applicable to purchase-money security interests, as defined in section 9-103. It affords a special, nontemporal priority to those purchase-money security interests that satisfy the statutory conditions. In most cases, priority will be over a security interest asserted under an after-acquired property clause. See section 9-204 on the extent to which security interests in after-acquired property are validated.

A purchase-money security interest can be created only in goods and software. See section 9-103. Section 9-324(a), which follows former section 9-312(4), contains the general rule for purchase-money security interests in goods. It is subject to subsections (b) and (c), which derive from former section 9-312(3) and apply to purchase-money security interests in inventory, and subsections (d) and (e), which apply to purchase-money security interests in livestock that are farm products. Subsection (f) applies to purchase-money security interests in software. Subsection (g) deals with the relatively unusual case in which a debtor creates two purchase-money security interests in the same collateral and both security interests qualify for special priority under one of the other subsections.

Former section 9-312(2) contained a rule affording special priority to those who provided secured credit that enabled a debtor to produce crops. This rule proved unworkable and has been eliminated from this article. Instead, model section 9-324A contains a revised production-money priority rule. That section is a model, not uniform, provision. The sponsors of the UCC have taken no position as to whether it should be enacted, instead leaving the matter for state legislatures to consider if they are so inclined.

3. Purchase-Money Priority in Goods Other Than Inventory and Livestock. Subsection (a) states a general rule applicable to all types of goods except inventory and farm-products livestock: The purchase-money interest takes priority if it is perfected when the debtor receives possession of the collateral or within 20 days thereafter. (As to the 20-day "grace period," compare section 9-317(e). Former sections 9-301(2) and 9-312(4) contained a 10-day grace period.) The perfection requirement means that the purchase-money secured party either has filed a financing statement before that time or has a temporarily perfected security interest in goods covered by documents under section 9-312(e) and (f) which is continued in a perfected status by filing before the expiration of the 20-day period specified in that section. A purchase-money security interest qualifies for priority under subsection (a), even if the purchase-money secured party knows that a conflicting security interest has been created and/or that the holder of the conflicting interest has filed a financing statement covering the collateral.

Normally, there will be no question when "the debtor receives possession of the collateral" for purposes of subsection (a). However, sometimes a debtor buys goods and takes possession of them in stages, and then assembly and testing are completed (by the seller or debtor-buyer) at the debtor's location. Under those circumstances, the buyer "takes possession" within the meaning of subsection (a) when, after an inspection of the portion of the goods in the debtor's possession, it would be apparent to a potential lender to the debtor that the debtor has acquired an interest in the goods taken as a whole.

A similar issue concerning the time when "the debtor receives possession" arises when a person acquires possession of goods under a transaction that is not governed by this article and then later agrees to buy the goods on secured credit. For example, a person may take possession of goods as lessee under a lease contract and then exercise an option to purchase the goods from the lessor on secured credit. Under section 2A-307(1), creditors of the lessee generally take subject to the lease contract; filing a financing statement against the lessee is unnecessary to protect the lessor's leasehold or residual interest. Once the lease is converted to a security interest, filing a financing statement is necessary to protect the seller's (former lessor's) security interest. Accordingly, the 20-day period in subsection (a) does not commence until the goods become "collateral" (defined in section 9-102), i.e., until they are subject to a security interest.

4. Purchase-Money Security Interests in Inventory. Subsections (b) and (c) afford a means by which a purchase-money security interest in inventory can achieve priority over an earlier-filed security interest in the same collateral. To achieve priority, the purchase-money security interest must be perfected when the debtor receives possession of the inventory. For a discussion of when "the debtor receives possession," see comment 3, above. The 20-day grace period of subsection (a) does not apply.

The arrangement between an inventory secured party and its debtor typically requires the secured party to make periodic advances against incoming inventory or periodic releases of old inventory as new inventory is received. A fraudulent debtor may apply to the secured party for advances even though it has already given a purchase-money security interest in the inventory to another secured party. For this reason, subsections (b)(2) through (4) and (c) impose a second condition for the purchase-money security interest's achieving priority: The purchase-money secured party must give notification to the holder of a conflicting security interest who filed against the same item or type of inventory before the purchase-money secured party filed or its security interest became perfected temporarily under section 9-312(e) or (f). The notification requirement protects the non-purchase-money inventory secured party in such a situation: If the inventory secured party has received notification, it presumably will not make an advance; if it has not received notification (or if the other security interest does not qualify as purchase-money), any advance the inventory secured party may make ordinarily will have priority under section 9-322. Inasmuch as an arrangement for periodic advances against incoming goods is unusual outside the inventory field, subsection (a) does not contain a notification requirement.

5. Notification to Conflicting Inventory Secured Party: Timing. Under subsection (b)(3), the perfected purchase-money security interest achieves priority over a conflicting security interest only if the holder of the conflicting security interest receives a notification within five years before the debtor receives possession of the purchase-money collateral. If the debtor never receives possession, the five-year period never begins, and the purchase-money security interest has priority, even if notification is not given. However, where the purchase-money inventory financing began by the purchase-money secured party's possession of a negotiable document of title, to retain priority the secured party must give the notification required by subsection (b) at or before the usual time, i.e., when the debtor gets possession of the inventory, even though the security interest remains perfected for 20 days under section 9-312(e) or (f).

Some people have mistakenly read former section 9-312(3)(b) to require, as a condition of purchase-money priority in inventory, that the purchase-money secured party give the notification before it files a financing statement. Read correctly, the "before" clauses compare (i) the time when the holder of the conflicting security interest filed a financing statement with (ii) the time when the purchase-money security interest becomes perfected by filing or automatically perfected temporarily. Only if (i) occurs before (ii) must notification be given to the holder of the conflicting security interest. Subsection (c) has been rewritten to clarify this point.

6. Notification to Conflicting Inventory Secured Party: Address. Inasmuch as the address provided as that of the secured party on a filed financing statement is an "address that is reasonable under the circumstances," the holder of a purchase-money security interest may satisfy the requirement to "send" notification to the holder of a conflicting security interest in inventory by sending a notification to that address, even if the address is or becomes incorrect. See section 9-102 (definition of "send"). Similarly, because the address is "held out by (the holder of the conflicting security interest) as the place for receipt of such communications (i.e., communications relating to security interests)," the holder is deemed to have "received" a notification delivered to that address. See section 1-202(e).

7. Consignments. Subsections (b) and (c) also determine the priority of a consignor's interest in consigned goods as against a security interest in the goods created by the consignee. Inasmuch as a consignment subject to this article is defined to be a purchase-money security interest, see section 9-103(d), no inference concerning the nature of the transaction should be drawn from the fact that a consignor uses the term "security interest" in its notice under subsection (b)(4). Similarly, a notice stating that the consignor has delivered or expects to deliver goods, properly described, "on consignment" meets the requirements of subsection (b)(4), even if it does not contain the term "security interest," and even if the transaction subsequently is determined to be a security interest. Cf. section 9-505 (use of "consignor" and "consignee" in financing statement).

8. Priority in Proceeds: General. When the purchase-money secured party has priority over another secured party, the question arises whether this priority extends to the proceeds of the original collateral. Subsections (a), (d), and (f) give an affirmative answer, but only as to proceeds in which the security interest is perfected (see section 9-315). Although this qualification did not appear in former section 9-312(4), it was implicit in that provision.

In the case of inventory collateral under subsection (b), where financing frequently is based on the resulting accounts, chattel paper, or other proceeds, the special priority of the purchase-money secured interest carries over into only certain types of proceeds. As under former section 9-312(3), the purchase-money priority in inventory under subsection (b) carries over into identifiable cash proceeds (defined in section 9-102) received on or before the delivery of the inventory to a buyer.

As a general matter, also like former section 9-312(3), the purchase-money priority in inventory does not carry over into proceeds consisting of accounts or chattel paper. Many parties financing inventory are quite content to protect their first-priority security interest in the inventory itself. They realize that when the inventory is sold, someone else will be financing the resulting receivables (accounts or chattel paper), and the priority for inventory will not run forward to the receivables constituting the proceeds. Indeed, the cash supplied by the receivables financer often will be used to pay the inventory financing. In some situations, the party financing the inventory on a purchase-money basis makes contractual arrangements that the proceeds of receivables financing by another be devoted to paying off the inventory security interest.

However, the purchase-money priority in inventory does carry over to proceeds consisting of chattel paper and its proceeds (and also to instruments) to the extent provided in section 9-330. Under section 9-330(e), the holder of a purchase-money security interest in inventory is deemed to give new value for proceeds consisting of chattel paper. Taken together, sections 9-324(b) and 9-330(e) enable a purchase-money inventory secured party to obtain priority in chattel paper constituting proceeds of the inventory, even if the secured party does not actually give new value for the chattel paper, provided the purchase-money secured party satisfies the other conditions for achieving priority.

When the proceeds of original collateral (goods or software) consist of a deposit account, section 9-327 governs priority to the extent it conflicts with the priority rules of this section.

9. Priority in Accounts Constituting Proceeds of Inventory. The application of the priority rules in subsection (b) is shown by the following examples:

Example 1: Debtor creates a security interest in its existing and after-acquired inventory in favor of SP-1, who files a financing statement covering inventory. SP-2 subsequently takes a purchase-money security interest in certain inventory and, under subsection (b), achieves priority in this inventory over SP-1. This inventory is then sold, producing accounts. Accounts are not cash proceeds, and so the special purchase-money priority in the inventory does not control the priority in the accounts. Rather, the first-to-file-or-perfect rule of section 9-322(a)(1) applies. The time of SP-1's filing as to the inventory is also the time of filing as to the accounts under section 9-322(b). Assuming that each security interest in the accounts proceeds remains perfected under section 9-315, SP-1 has priority as to the accounts.

Example 2: In Example 1, if SP-2 had filed directly against accounts, the date of that filing as to accounts would be compared with the date of SP-1's filing as to the inventory. The first filed would prevail under section 9-322(a)(1).

Example 3: If SP-3 had filed against accounts in Example 1 before either SP-1 or SP-2 filed against inventory, SP-3's filing against accounts would have priority over the filings of SP-1 and SP-2. This result obtains even though the filings against inventory are effective to continue the perfected status of SP-1's and SP-2's security interest in the accounts beyond the 20-day period of automatic perfection. See section 9-315. SP-1's and SP-2's position as to the inventory does not give them a claim to accounts (as proceeds of the inventory) which is senior to someone who has filed earlier against accounts. If, on the other hand, either SP-1's or SP-2's filing against the inventory preceded SP-3's filing against accounts, SP-1 or SP-2 would outrank SP-3 as to the accounts.

10. Purchase-Money Security Interests in Livestock. New subsections (d) and (e) provide a purchase-money priority rule for farm-products livestock. They are patterned on the purchase-money priority rule for inventory found in subsections (b) and (c) and include a requirement that the purchase-money secured party notify earlier-filed parties. Two differences between subsections (b) and (d) are noteworthy. First, unlike the purchase-money inventory lender, the purchase-money livestock lender enjoys priority in all proceeds of the collateral. Thus, under subsection (d), the purchase-money secured party takes priority in accounts over an earlier-filed accounts financer. Second, subsection (d) affords priority in certain products of the collateral as well as proceeds.

11. Purchase-Money Security Interests in Aquatic Farm Products. Aquatic goods produced in aquacultural operations (e.g., catfish raised on a catfish farm) are farm products. See section 9-102 (definition of "farm products"). The definition does not indicate whether aquatic goods are "crops," as to which the model production money security interest priority in section 9-324A applies, or "livestock," as to which the purchase-money priority in subsection (d) of this section applies. This article leaves courts free to determine the classification of particular aquatic goods on a case-by-case basis, applying whichever priority rule makes more sense in the overall context of the debtor's business.

12. Purchase-Money Security Interests in Software. Subsection (f) governs the priority of purchase-money security interests in software. Under section 9-103(c), a purchase-money security interest arises in software only if the debtor acquires its interest in the software for the principal purpose of using the software in goods subject to a purchase-money security interest. Under subsection (f), a purchase-money security interest in software has the same priority as the purchase-money security interest in the goods in which the software was acquired for use. This priority is determined under subsections (b) and (c) (for inventory) or (a) (for other goods).

13. Multiple Purchase-Money Security Interests. New subsection (g) governs priority among multiple purchase-money security interests in the same collateral. It grants priority to purchase-money security interests securing the price of collateral (i.e., created in favor of the seller) over purchase-money security interests that secure enabling loans. Section 7.2(c) of the Restatement (3d) of the Law of Property (Mortgages) (1997) adopts this rule with respect to real property mortgages. As comment d to that section explains:

the equities favor the vendor. Not only does the vendor part with specific real estate rather than money, but the vendor would never relinquish it at all except on the understanding that the vendor will be able to use it to satisfy the obligation to pay the price. This is the case even though the vendor may know that the mortgagor is going to finance the transaction in part by borrowing from a third party and giving a mortgage to secure that obligation. In the final analysis, the law is more sympathetic to the vendor's hazard of losing real estate previously owned than to the third party lender's risk of being unable to collect from an interest in real estate that never previously belonged to it.

The first-to-file-or-perfect rule of section 9-322 applies to multiple purchase-money security interests securing enabling loans.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. "Double Debtor" Problem. This section addresses the "double debtor" problem, which arises when a debtor acquires property that is subject to a security interest created by another debtor.

3. Taking Subject to Perfected Security Interest. Consider the following scenario:

Example 1: A owns an item of equipment subject to a perfected security interest in favor of SP-A. A sells the equipment to B, not in the ordinary course of business. B acquires its interest subject to SP-A's security interest. See sections 9-201 and 9-315(a)(1)(A). Under this section, if B creates a security interest in the equipment in favor of SP-B, SP-B's security interest is subordinate to SP-A's security interest, even if SP-B filed against B before SP-A filed against A, and even if SP-B took a purchase-money security interest. Normally, SP-B could have investigated the source of the equipment and discovered SP-A's filing before making an advance against the equipment, whereas SP-A had no reason to search the filings against someone other than its debtor, A.

4. Taking Subject to Unperfected Security Interest. This section applies only if the security interest in the transferred collateral was perfected when the transferee acquired the collateral. See subsection (a)(2). If this condition is not met, then the normal priority rules apply.

Example 2: A owns an item of equipment subject to an unperfected security interest in favor of SP-A. A sells the equipment to B, who gives value and takes delivery of the equipment without knowledge of the security interest. B takes free of the security interest. See section 9-317(b). If B then creates a security interest in favor of SP-B, no priority issue arises; SP-B has the only security interest in the equipment.

Example 3: The facts are as in Example 2, except that B knows of SP-A's security interest and therefore takes the equipment subject to it. If B creates a security interest in the equipment in favor of SP-B, this section does not determine the relative priority of the security interests. Rather, the normal priority rules govern. If SP-B perfects its security interest, then, under section 9-322(a)(2), SP-A's unperfected security interest will be junior to SP-B's perfected security interest. The award of priority to SP-B is premised on the belief that SP-A's failure to file could have misled SP-B.

5. Taking Subject to Perfected Security Interest that Becomes Unperfected. This section applies only if the security interest in the transferred collateral did not become unperfected at any time after the transferee acquired the collateral. See subsection (a)(3). If this condition is not met, then the normal priority rules apply.

Example 4: As in Example 1, A owns an item of equipment subject to a perfected security interest in favor of SP-A. A sells the equipment to B, not in the ordinary course of business. B acquires its interest subject to SP-A's security interest. See sections 9-201 and 9-315(a)(1)(A). B creates a security interest in favor of SP-B, and SP-B perfects its security interest. This section provides that SP-A's security interest is senior to SP-B's. However, if SP-A's financing statement lapses while SP-B's security interest is perfected, then the normal priority rules would apply, and SP-B's security interest would become senior to SP-A's security interest. See sections 9-322(a)(2) and 9-515(c).

6. Unusual Situations. The appropriateness of the rule of subsection (a) is most apparent when it works to subordinate security interests having priority under the basic priority rules of section 9-322(a) or the purchase-money priority rules of section 9-324. The rule also works properly when applied to the security interest of a buyer under section 2-711(3) or a lessee under section 2A-508(5). However, subsection (a) may provide an inappropriate resolution of the "double debtor" problem in some of the wide variety of other contexts in which the problem may arise. Although subsection (b) limits the application of subsection (a) to those cases in which subordination is known to be appropriate, courts should apply the rule in other settings, if necessary to promote the underlying purposes and policies of the Uniform Commercial Code. See section 1-102(1).

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Subordination of Security Interests Created by New Debtor. This section addresses the priority contests that may arise when a new debtor becomes bound by the security agreement of an original debtor and each debtor has a secured creditor.

Subsection (a) subordinates the original debtor's secured party's security interest perfected against the new debtor by a filed financing statement that would be ineffective to perfect the security interest but for Section 9-508 or, if the original debtor and new debtor are located in different jurisdictions, Section 9-316(i)(1). The security interest is subordinated to security interests in the same collateral perfected by another method, e.g., by filing against the new debtor. This section does not subordinate a security interest perfected by a new initial financing statement providing the name of the new debtor, even if the initial financing statement is filed to maintain the effectiveness of a financing statement under the circumstances described in section 9-508(b). Nor does it subordinate a security interest perfected by a financing statement filed against the original debtor which remains effective against collateral transferred by the original debtor to the new debtor. See section 9-508(c). Concerning priority contests involving transferred collateral, see sections 9-325 and 9-507.

Example 1: SP-X holds a perfected-by-filing security interest in X Corp's existing and after-acquired inventory, and SP-Z holds a perfected-by-possession security interest in an item of Z Corp's inventory. Both X Corp and Z Corp are located in the same jurisdiction under Section 9-307. Z Corp becomes bound as debtor by X Corp's security agreement (e.g., Z Corp buys X Corp's assets and assumes its security agreement). See section 9-203(d). But for Section 9-508, SP-X's financing statement would be ineffective to perfect a security interest in the item of inventory in which Z Corp has rights. However, subsection (a) provides that SP-X's perfected security interest is subordinate to SP-Z's, regardless of whether SP-X's financing statement was filed before SP-Z perfected its security interest.

Example 2: SP-X holds a perfected-by-filing security interest in X Corp's existing and after-acquired inventory, and SP-Z holds a perfected-by-filing security interest in Z Corp's existing and after-acquired inventory. Both X Corp and Z Corp are located in the same jurisdiction under Section 9-307. Z Corp becomes bound as debtor by X Corp's security agreement. Immediately thereafter, and before the effectiveness of SP-X's financing statement lapses, Z Corp acquires a new item of inventory. But for Section 9-508, SP-X's financing statement would be ineffective to perfect a security interest in the new item of inventory in which Z Corp has rights. However, because SP-Z's security interest was perfected by a filing whose effectiveness does not depend on Section 9-316(i)(1) or 9-508, subsection (a) subordinates SP-X's perfected security interest to SP-Z's. This would be the case even if SP-Z filed after Z Corp became bound by X Corp's security agreement, and regardless of which financing statement was filed first.

The same result would obtain if X Corp and Z Corp were located in different jurisdictions. SPX's security interest would be perfected by a financing statement that would be ineffective but for Section 9-316(i)(1), whereas the effectiveness of SP-Z's filing does not depend on Section 9- 316(i)(1) or 9-508.

3. Other Priority Rules. Subsection (b) addresses the priority among security interests created by the original debtor (X Corp). By invoking the other priority rules of this subpart, as applicable, subsection (b) preserves the relative priority of security interests created by the original debtor.

Example 3: Under the facts of Example 2, SP-Y also holds a perfected-by-filing security interest in X Corp's existing and after-acquired inventory. SP-Y filed after SP-X. Inasmuch as both SP-X's and SP-Y's security interests in inventory acquired by Z Corp after it became bound would be unperfected but for the application of section 9-508, the normal priority rules determine their relative priorities. Under the "first-to-file-or-perfect" rule of section 9-322(a)(1), SP-X has priority over SP-Y.

Example 4: Under the facts of Example 3, after Z Corp became bound by X Corp's security agreement, SP-Y promptly filed a new initial financing statement against Z Corp. SP-X's security interest remains perfected only by virtue of its original filing against X Corp which "would be ineffective to perfect the security interest but for the application of Section 9-508." Because SP-Y's security interest is perfected by the filing of a financing statement whose effectiveness does not depend on Section 9-508 or 9-316(i)(1), subsection (a) subordinates SP-X's security interest to SP-Y's. If both SP-X and SP-Y file a new initial financing statement against Z Corp, then the "first-to-file-or-perfect" rule of Section 9-322(a)(1) governs their priority inter se as well as their priority against SP-Z.

The second sentence of subsection (b) effectively limits the applicability of the first sentence to situations in which a new debtor has become bound by more than one security agreement entered into by the same original debtor. When the new debtor has become bound by security agreements entered into by different original debtors, the second sentence provides that priority is based on priority in time of the new debtor's becoming bound.

Example 5: Under the facts of Example 2, SP-W holds a perfected-by-filing security interest in W Corp's existing and after-acquired inventory. After Z Corp became bound by X Corp's security agreement in favor of SP-X, Z Corp became bound by W Corp's security agreement. Under subsection (b), SP-W's security interest in inventory acquired by Z Corp is subordinate to that of SP-X, because Z Corp became bound under SP-X's security agreement before it became bound under SP-W's security agreement. This is the result regardless of which financing statement (SP-X's or SP-W's) was filed first.

The second sentence of subsection (b) reflects the generally accepted view that priority based on the first-to-file rule is inappropriate for resolving priority disputes when the filings were made against different debtors. Like subsection (a) and the first sentence of subsection (b), however, the second sentence of subsection (b) relates only to priority conflicts among security interests would be unperfected but for the application of Section 9-316(i)(1) or 9-508.'

Example 6: Under the facts of Example 5, after Z Corp became bound by W Corp's security agreement, SP-W promptly filed a new initial financing statement against Z Corp. At that time, SP-X's security interest was perfected only pursuant to its original filing against X Corp "would be ineffective to perfect the security interest but for the application of Section 9-508." Because SP-W's security interest is perfected by the filing of a financing statement whose effectiveness does not depend on Section 9-316(i)(1) or 9-508, subsection (a) subordinates SP-X's security interest to SP-W's. If both SP-X and SP-W file a new initial financing statement against Z Corp, then the "first-to-file-or-perfect" rule of Section 9-322(a)(1) governs their priority inter se as well as their priority against SP-Z.

OFFICIAL COMMENT

Comment. - 1. Source. New; derived from former section 9-115(5).

2. Scope of This Section. This section contains the rules governing the priority of conflicting security interests in deposit accounts. It overrides conflicting priority rules. See sections 9-322(f)(1) and 9-324(a), (b), (d), and (f). This section does not apply to accounts evidenced by an instrument (e.g., certain certificates of deposit), which by definition are not "deposit accounts."

3. Control. Under paragraph (1), security interests perfected by control (sections 9-104 and 9-314) take priority over those perfected otherwise, e.g., as identifiable cash proceeds under section 9-315. Secured parties for whom the deposit account is an integral part of the credit decision will, at a minimum, insist upon the right to immediate access to the deposit account upon the debtor's default (i.e., control). Those secured parties for whom the deposit account is less essential will not take control, thereby running the risk that the debtor will dispose of funds on deposit (either outright or for collateral purposes) after default but before the account can be frozen by court order or the secured party can obtain control.

Paragraph (2) governs the case (expected to be very rare) in which a bank enters into a section 9-104(a)(2) control agreement with more than one secured party. It provides that the security interests rank according to time of obtaining control. If the bank is solvent and the control agreements are well drafted, the bank will be liable to each secured party, and the priority rule will have no practical effect.

4. Priority of Bank. Under paragraph (3), the security interest of the bank with which the deposit account is maintained normally takes priority over all other conflicting security interests in the deposit account, regardless of whether the deposit account constitutes the competing secured party's original collateral or its proceeds. A rule of this kind enables banks to extend credit to their depositors without the need to examine either the public record or their own records to determine whether another party might have a security interest in the deposit account.

A secured party who takes a security interest in the deposit account as original collateral can protect itself against the results of this rule in one of two ways. It can take control of the deposit account by becoming the bank's customer. Under paragraph (4), this arrangement operates to subordinate the bank's security interest. Alternatively, the secured party can obtain a subordination agreement from the bank. See section 9-339.

A secured party who claims the deposit account as proceeds of other collateral can reduce the risk of becoming junior by obtaining the debtor's agreement to deposit proceeds into a specific cash-collateral account and obtaining the agreement of that bank to subordinate all its claims to those of the secured party. But if the debtor violates its agreement and deposits funds into a deposit account other than the cash-collateral account, the secured party risks being subordinated.

5. Priority in Proceeds of, and Funds Transferred from, Deposit Account. The priority afforded by this section does not extend to proceeds of a deposit account. Rather, section 9-322(c) through (e) and the provisions referred to in section 9-322(f) govern priorities in proceeds of a deposit account. Section 9-315(d) addresses continuation of perfection in proceeds of deposit accounts. As to funds transferred from a deposit account that serves as collateral, see section 9-332.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-115(5).

2. Scope of This Section. This section contains the rules governing the priority of conflicting security interests in investment property. Paragraph (1) states the most important general rule - that a secured party who obtains control has priority over a secured party who does not obtain control. Paragraphs (2) through (4) deal with conflicting security interests each of which is perfected by control. Paragraph (5) addresses the priority of a security interest in a certificated security which is perfected by delivery but not control. Paragraph (6) deals with the relatively unusual circumstance in which a broker, securities intermediary, or commodity intermediary has created conflicting security interests none of which is perfected by control. Paragraph (7) provides that the general priority rules of sections 9-322 and 9-323 apply to cases not covered by the specific rules in this section. The principal application of this residual rule is that the usual first in time of filing rule applies to conflicting security interests that are perfected only by filing. Because the control priority rule of paragraph (1) provides for the ordinary cases in which persons purchase securities on margin credit from their brokers, there is no need for special rules for purchase-money security interests. See also section 9-103 (limiting purchase-money collateral to goods and software).

3. General Rule: Priority of Security Interest Perfected by Control. Under paragraph (1), a secured party who obtains control has priority over a secured party who does not obtain control. The control priority rule does not turn on either temporal sequence or awareness of conflicting security interests. Rather, it is a structural rule, based on the principle that a lender should be able to rely on the collateral without question if the lender has taken the necessary steps to assure itself that it is in a position where it can foreclose on the collateral without further action by the debtor. The control priority rule is necessary because the perfection rules provide considerable flexibility in structuring secured financing arrangements. For example, at the "retail" level, a secured lender to an investor who wants the full measure of protection can obtain control, but the creditor may be willing to accept the greater measure of risk that follows from perfection by filing. Similarly, at the "wholesale" level, a lender to securities firms can leave the collateral with the debtor and obtain a perfected security interest under the automatic perfection rule of section 9-309(10), but a lender who wants to be entirely sure of its position will want to obtain control. The control priority rule of paragraph (1) is an essential part of this system of flexibility. It is feasible to provide more than one method of perfecting security interests only if the rules ensure that those who take the necessary steps to obtain the full measure of protection do not run the risk of subordination to those who have not taken such steps. A secured party who is unwilling to run the risk that the debtor has granted or will grant a conflicting control security interest should not make a loan without obtaining control of the collateral.

As applied to the retail level, the control priority rule means that a secured party who obtains control has priority over a conflicting security interest perfected by filing without regard to inquiry into whether the control secured party was aware of the filed security interest. Prior to the 1994 revisions to articles 8 and 9, article 9 did not permit perfection of security interests in securities by filing. Accordingly, parties who deal in securities never developed a practice of searching the UCC files before conducting securities transactions. Although filing is now a permissible method of perfection, in order to avoid disruption of existing practices in this business it is necessary to give perfection by filing a different and more limited effect for securities than for some other forms of collateral. The priority rules are not based on the assumption that parties who perfect by the usual method of obtaining control will search the files. Quite the contrary, the control priority rule is intended to ensure that, with respect to investment property, secured parties who do obtain control are entirely unaffected by filings. To state the point another way, perfection by filing is intended to affect only general creditors or other secured creditors who rely on filing. The rule that a security interest perfected by filing can be primed by a control security interest, without regard to awareness, is a consequence of the system of perfection and priority rules for investment property. These rules are designed to take account of the circumstances of the securities markets, where filing is not given the same effect as for some other forms of property. No implication is made about the effect of filing with respect to security interests in other forms of property, nor about other article 9 rules, e.g., section 9-330, which govern the circumstances in which security interests in other forms of property perfected by filing can be primed by subsequent perfected security interests.

The following examples illustrate the application of the priority rule in paragraph (1):

Example 1: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor's investment property. At that time Debtor owns 1000 shares of XYZ Co. stock for which Debtor has a certificate. Alpha perfects by filing. Later, Debtor borrows from Beta and grants Beta a security interest in the 1000 shares of XYZ Co. stock. Debtor delivers the certificate, properly indorsed, to Beta. Alpha and Beta both have perfected security interests in the XYZ Co. stock. Beta has control, see section 8-106(b)(1), and hence has priority over Alpha.

Example 2: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor's investment property. At that time Debtor owns 1000 shares of XYZ Co. stock, held through a securities account with Able & Co. Alpha perfects by filing. Later, Debtor borrows from Beta and grants Beta a security interest in the 1000 shares of XYZ Co. stock. Debtor instructs Able to have the 1000 shares transferred through the clearing corporation to Custodian Bank, to be credited to Beta's account with Custodian Bank. Alpha and Beta both have perfected security interests in the XYZ Co. stock. Beta has control, see section 8-106(d)(1), and hence has priority over Alpha.

Example 3: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor's investment property. At that time Debtor owns 1000 shares of XYZ Co. stock, which is held through a securities account with Able & Co. Alpha perfects by filing. Later, Debtor borrows from Beta and grants Beta a security interest in the 1000 shares of XYZ Co. stock. Debtor, Able, and Beta enter into an agreement under which Debtor will continue to receive dividends and distributions, and will continue to have the right to direct dispositions, but Beta will also have the right to direct dispositions and receive the proceeds. Alpha and Beta both have perfected security interests in the XYZ Co. stock (more precisely, in the Debtor's security entitlement to the financial asset consisting of the XYZ Co. stock). Beta has control, see section 8-106(d)(2), and hence has priority over Alpha.

Example 4: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor's investment property. At that time Debtor owns 1000 shares of XYZ Co. stock, held through a securities account with Able & Co. Alpha perfects by filing. Debtor's agreement with Able & Co. provides that Able has a security interest in all securities carried in the account as security for any obligations of Debtor to Able. Debtor incurs obligations to Able and later defaults on the obligations to Alpha and Able. Able has control by virtue of the rule of section 8-106(e) that if a customer grants a security interest to its own intermediary, the intermediary has control. Since Alpha does not have control, Able has priority over Alpha under the general control priority rule of paragraph (1).

4. Conflicting Security Interests Perfected by Control: Priority of Securities Intermediary or Commodity Intermediary. Paragraphs (2) through (4) govern the priority of conflicting security interests each of which is perfected by control. The following example explains the application of the rules in paragraphs (3) and (4):

Example 5: Debtor holds securities through a securities account with Able & Co. Debtor's agreement with Able & Co. provides that Able has a security interest in all securities carried in the account as security for any obligations of Debtor to Able. Debtor borrows from Beta and grants Beta a security interest in 1000 shares of XYZ Co. stock carried in the account. Debtor, Able, and Beta enter into an agreement under which Debtor will continue to receive dividends and distributions and will continue to have the right to direct dispositions, but Beta will also have the right to direct dispositions and receive the proceeds. Debtor incurs obligations to Able and later defaults on the obligations to Beta and Able. Both Beta and Able have control, so the general control priority rule of paragraph (1) does not apply. Compare Example 4. Paragraph (3) provides that a security interest held by a securities intermediary in positions of its own customer has priority over a conflicting security interest of an external lender, so Able has priority over Beta. (Paragraph (4) contains a parallel rule for commodity intermediaries.) The agreement among Able, Beta, and Debtor could, of course, determine the relative priority of the security interests of Able and Beta, see section 9-339, but the fact that the intermediary has agreed to act on the instructions of a secured party such as Beta does not itself imply any agreement by the intermediary to subordinate.

5. Conflicting Security Interests Perfected by Control: Temporal Priority. Former section 9-115 introduced into article 9 the concept of conflicting security interests that rank equally. Paragraph (2) of this section governs priority in those circumstances in which more than one secured party (other than a broker, securities intermediary, or commodity intermediary) has control. It replaces the equal-priority rule for conflicting security interests in investment property with a temporal rule. For securities, both certificated and uncertificated, under paragraph (2)(A) priority is based on the time that control is obtained. For security entitlements carried in securities accounts, the treatment is more complex. Paragraph (2)(B) bases priority on the timing of the steps taken to achieve control. The following example illustrates the application of paragraph (2).

Example 6: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor's investment property. At that time Debtor owns a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through a securities account with Able & Co. Debtor, Able, and Alpha enter into an agreement under which Debtor will continue to receive dividends and distributions, and will continue to have the right to direct dispositions, but Alpha will also have the right to direct dispositions and receive the proceeds. Later, Debtor borrows from Beta and grants Beta a security interest in all its investment property, existing and after-acquired. Debtor, Able, and Beta enter into an agreement under which Debtor will continue to receive dividends and distributions, and will continue to have the right to direct dispositions, but Beta will also have the right to direct dispositions and receive the proceeds. Alpha and Beta both have perfected-by-control security interests in the security entitlement to the XYZ Co. stock by virtue of their agreements with Able. See sections 8-106(d)(2), 9-106(a), and 9-314(a). Under paragraph (2)(B)(ii), the priority of each security interest dates from the time of the secured party's agreement with Able. Because Alpha's agreement was first in time, Alpha has priority. This priority applies equally to security entitlements to financial assets credited to the account after the agreement was entered into.

The priority rule is analogous to "first-to-file" priority under section 9-322 with respect to after-acquired collateral. Paragraphs (2)(B)(i) and (2)(B)(iii) provide similar rules for security entitlements as to which control is obtained by other methods, and paragraph (2)(C) provides a similar rule for commodity contracts carried in a commodity account. Section 8-510 also has been revised to provide a temporal priority conforming to paragraph (2)(B).

6. Certificated Securities. A long-standing practice has developed whereby secured parties whose collateral consists of a security evidenced by a security certificate take possession of the security certificate. If the security certificate is in bearer form, the secured party's acquisition of possession constitutes "delivery" under section 8-301(a)(1), and the delivery constitutes "control" under section 8-106(a). Comment 5 discusses the priority of security interests perfected by control of investment property.

If the security certificate is in registered form, the secured party will not achieve control over the security unless the security certificate contains an appropriate indorsement or is (re)registered in the secured party's name. See section 8-106(b). However, the secured party's acquisition of possession constitutes "delivery" of the security certificate under section 8-301 and serves to perfect the security interest under section 9-313(a), even if the security certificate has not been appropriately indorsed and has not been (re)registered in the secured party's name. A security interest perfected by this method has priority over a security interest perfected other than by control (e.g., by filing). See paragraph (5).

The priority rule stated in paragraph (5) may seem anomalous, in that it can afford less favorable treatment to purchasers who buy collateral outright than to those who take a security interest in it. For example, a buyer of a security certificate would cut off a security interest perfected by filing only if the buyer achieves the status of a protected purchaser under section 8-303. The buyer would not be a protected purchaser, for example, if it does not obtain "control" under section 8-106 (e.g., if it fails to obtain a proper indorsement of the certificate) or if it had notice of an adverse claim under section 8-105. The apparent anomaly disappears, however, when one understands the priority rule not as one intended to protect careless or guilty parties, but as one that eliminates the need to conduct a search of the public records only insofar as necessary to serve the needs of the securities markets.

7. Secured Financing of Securities Firms. Priority questions concerning security interests granted by brokers and securities intermediaries are governed by the general control-beats-non-control priority rule of paragraph (1), as supplemented by the special rules set out in paragraphs (2) (temporal priority - first to control), (3) (special priority for securities intermediary), and (6) (equal priority for noncontrol). The following examples illustrate the priority rules as applied to this setting. (In all cases it is assumed that the debtor retains sufficient other securities to satisfy all customers' claims. This section deals with the relative rights of secured lenders to a securities firm. Disputes between a secured lender and the firm's own customers are governed by section 8-511.)

Example 7: Able & Co., a securities dealer, enters into financing arrangements with two lenders, Alpha Bank and Beta Bank. In each case the agreements provide that the lender will have a security interest in the securities identified on lists provided to the lender on a daily basis, that the debtor will deliver the securities to the lender on demand, and that the debtor will not list as collateral any securities which the debtor has pledged to any other lender. Upon Able's insolvency it is discovered that Able has listed the same securities on the collateral lists provided to both Alpha and Beta. Alpha and Beta both have perfected security interests under the automatic-perfection rule of section 9-309(10). Neither Alpha nor Beta has control. Paragraph (6) provides that the security interests of Alpha and Beta rank equally, because each of them has a noncontrol security interest granted by a securities firm. They share pro-rata.

Example 8: Able enters into financing arrangements, with Alpha Bank and Beta Bank as in Example 7. At some point, however, Beta decides that it is unwilling to continue to provide financing on a noncontrol basis. Able directs the clearing corporation where it holds its principal inventory of securities to move specified securities into Beta's account. Upon Able's insolvency it is discovered that a list of collateral provided to Alpha includes securities that had been moved to Beta's account. Both Alpha and Beta have perfected security interests; Alpha under the automatic-perfection rule of section 9-309(10), and Beta under that rule and also the perfection-by-control rule in section 9-314(a). Beta has control but Alpha does not. Beta has priority over Alpha under paragraph (1).

Example 9: Able & Co. carries its principal inventory of securities through Clearing Corporation, which offers a "shared control" facility whereby a participant securities firm can enter into an arrangement with a lender under which the securities firm will retain the power to trade and otherwise direct dispositions of securities carried in its account, but Clearing Corporation agrees that, at any time the lender so directs, Clearing Corporation will transfer any securities from the firm's account to the lender's account or otherwise dispose of them as directed by the lender. Able enters into financing arrangements with two lenders, Alpha and Beta, each of which obtains such a control agreement from Clearing Corporation. The agreement with each lender provides that Able will designate specific securities as collateral on lists provided to the lender on a daily or other periodic basis, and that it will not pledge the same securities to different lenders. Upon Able's insolvency, it is discovered that Able has listed the same securities on the collateral lists provided to both Alpha and Beta. Both Alpha and Beta have control over the disputed securities. Paragraph (2) awards priority to whichever secured party first entered into the agreement with Clearing Corporation.

8. Relation to Other Law. Section 1-103 provides that "unless displaced by particular provisions of the Uniform Commercial Code, the principles of law and equity . . . shall supplement its provisions." There may be circumstances in which a secured party's action in acquiring a security interest that has priority under this section constitutes conduct that is wrongful under other law. Though the possibility of such resort to other law may provide an appropriate "escape valve" for cases of egregious conduct, care must be taken to ensure that this does not impair the certainty and predictability of the priority rules. Whether a court may appropriately look to other law to impose liability upon or estop a secured party from asserting its article 9 priority depends on an assessment of the secured party's conduct under the standards established by such other law as well as a determination of whether the particular application of such other law is displaced by the UCC.

Some circumstances in which other law is clearly displaced by the UCC rules are readily identifiable. Common law "first in time, first in right" principles, or correlative tort liability rules such as common law conversion principles under which a purchaser may incur liability to a person with a prior property interest without regard to awareness of that claim, are necessarily displaced by the priority rules set out in this section since these rules determine the relative ranking of security interests in investment property. So too, article 8 provides protections against adverse claims to certain purchasers of interests in investment property. In circumstances where a secured party not only has priority under section 9-328, but also qualifies for protection against adverse claims under section 8-303, 8-502, or 8-510, resort to other law would be precluded.

In determining whether it is appropriate in a particular case to look to other law, account must also be taken of the policies that underlie the commercial law rules on securities markets and security interests in securities. A principal objective of the 1994 revision of article 8 and the provisions of article 9 governing investment property was to ensure that secured financing transactions can be implemented on a simple, timely, and certain basis. One of the circumstances that led to the revision was the concern that uncertainty in the application of the rules on secured transactions involving securities and other financial assets could contribute to systemic risk by impairing the ability of financial institutions to provide liquidity to the markets in times of stress. The control priority rule is designed to provide a clear and certain rule to ensure that lenders who have taken the necessary steps to establish control do not face a risk of subordination to other lenders who have not done so.

The control priority rule does not turn on an inquiry into the state of a secured party's awareness of potential conflicting claims because a rule under which a person's rights depended on that sort of after-the-fact inquiry could introduce an unacceptable measure of uncertainty. If an inquiry into awareness could provide a complete and satisfactory resolution of the problem in all cases, the priority rules of this section would have incorporated that test. The fact that they do not necessarily means that resort to other law based solely on that factor is precluded, though the question whether a control secured party induced or encouraged its financing arrangement with actual knowledge that the debtor would be violating the rights of another secured party may, in some circumstances, appropriately be treated as a factor in determining whether the control party's action is the kind of egregious conduct for which resort to other law is appropriate.

OFFICIAL COMMENT

Comment. - 1. Source. New; loosely modeled after former section 9-115(5).

2. General Rule. Paragraph (1) awards priority to a secured party who perfects a security interest directly in letter-of-credit rights (i.e., one that takes an assignment of proceeds and obtains consent of the issuer or any nominated person under section 5-114(c)) over another conflicting security interest (i.e., one that is perfected automatically in the letter-of-credit rights as supporting obligations under section 9-308(d)). This is consistent with international letter-of-credit practice and provides finality to payments made to recognized assignees of letter-of-credit proceeds. If an issuer or nominated person recognizes multiple security interests in a letter-of-credit right, resulting in multiple parties having control (section 9-107), under paragraph (2) the security interests rank according to the time of obtaining control.

3. Drawing Rights; Transferee Beneficiaries. Drawing under a letter of credit is personal to the beneficiary and requires the beneficiary to perform the conditions for drawing under the letter of credit. Accordingly, a beneficiary's grant of a security interest in a letter of credit includes the beneficiary's "letter-of-credit right" as defined in section 9-102 and the right to "proceeds of (the) letter of credit" as defined in section 5-114(a), but does not include the right to demand payment under the letter of credit.

Section 5-114(e) provides that the "(r)ights of a transferee beneficiary or nominated person are independent of the beneficiary's assignment of the proceeds of a letter of credit and are superior to the assignee's right to the proceeds." To the extent the rights of a transferee beneficiary or nominated person are independent and superior, this article does not apply. See section 9-109(c).

Under article 5, there is in effect a novation upon the transfer with the issuer becoming bound on a new, independent obligation to the transferee. The rights of nominated persons and transferee beneficiaries under a letter of credit include the right to demand payment from the issuer. Under section 5-114(e), their rights to payment are independent of their obligations to the beneficiary (or original beneficiary) and superior to the rights of assignees of letter-of-credit proceeds (section 5-114(c)) and others claiming a security interest in the beneficiary's (or original beneficiary's) letter-of-credit rights.

A transfer of drawing rights under a transferable letter of credit establishes independent article 5 rights in the transferee and does not create or perfect an article 9 security interest in the transferred drawing rights. The definition of "letter-of-credit right" in section 9-102 excludes a beneficiary's drawing rights. The exercise of drawing rights by a transferee beneficiary may breach a contractual obligation of the transferee to the original beneficiary concerning when and how much the transferee may draw or how it may use the funds received under the letter of credit. If, for example, drawing rights are transferred to support a sale or loan from the transferee to the original beneficiary, then the transferee would be obligated to the original beneficiary under the sale or loan agreement to account for any drawing and for the use of any funds received. The transferee's obligation would be governed by the applicable law of contracts or restitution.

4. Secured Party-Transferee Beneficiaries. As described in comment 3, drawing rights under letters of credit are transferred in many commercial contexts in which the transferee is not a secured party claiming a security interest in an underlying receivable supported by the letter of credit. Consequently, a transfer of a letter of credit is not a method of "perfection" of a security interest. The transferee's independent right to draw under the letter of credit and to receive and retain the value thereunder (in effect, priority) is not based on article 9 but on letter-of-credit law and the terms of the letter of credit. Assume, however, that a secured party does hold a security interest in a receivable that is owned by a beneficiary-debtor and supported by a transferable letter of credit. Assume further that the beneficiary-debtor causes the letter of credit to be transferred to the secured party, the secured party draws under the letter of credit, and, upon the issuer's payment to the secured party-transferee, the underlying account debtor's obligation to the original beneficiary-debtor is satisfied. In this situation, the payment to the secured party-transferee is proceeds of the receivable collected by the secured party-transferee. Consequently, the secured party-transferee would have certain duties to the debtor and third parties under article 9. For example, it would be obliged to collect under the letter of credit in a commercially reasonable manner and to remit any surplus pursuant to sections 9-607 and 9-608.

This scenario is problematic under letter-of-credit law and practice, inasmuch as a transferee beneficiary collects in its own right arising from its own performance. Accordingly, under section 5-114, the independent and superior rights of a transferee control over any inconsistent duties under article 9. A transferee beneficiary may take a transfer of drawing rights to avoid reliance on the original beneficiary's credit and collateral, and it may consider any article 9 rights superseded by its article 5 rights. Moreover, it will not always be clear (i) whether a transferee beneficiary has a security interest in the underlying collateral, (ii) whether any security interest is senior to the rights of others, or (iii) whether the transferee beneficiary is aware that it holds a security interest. There will be clear cases in which the role of a transferee beneficiary as such is merely incidental to a conventional secured financing. There also will be cases in which the existence of a security interest may have little to do with the position of a transferee beneficiary as such. In dealing with these cases and less clear cases involving the possible application of article 9 to a nominated person or a transferee beneficiary, the right to demand payment under a letter of credit should be distinguished from letter-of-credit rights. The courts also should give appropriate consideration to the policies and provisions of article 5 and letter-of-credit practice as well as article 9.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-308.

2. Non-Temporal Priority. This article permits a security interest in chattel paper or instruments to be perfected either by filing or by the secured party's taking possession. This section enables secured parties and other purchasers of chattel paper (both electronic and tangible) and instruments to obtain priority over earlier-perfected security interests, thereby promoting the negotiability of these types of receivables.

3. Chattel Paper. Subsections (a) and (b) follow former section 9-308 in distinguishing between earlier-perfected security interests in chattel paper that is claimed merely as proceeds of inventory subject to a security interest and chattel paper that is claimed other than merely as proceeds. Like former section 9-308, this section does not elaborate upon the phrase "merely as proceeds." For an elaboration, see PEB Commentary No. 8.

This section makes explicit the "good faith" requirement and retains the requirements of "the ordinary course of the purchaser's business" and the giving of "new value" as conditions for priority. Concerning the last, this article deletes former section 9-108 and adds to section 9-102 a completely different definition of the term "new value." Under subsection (e), the holder of a purchase-money security interest in inventory is deemed to give "new value" for chattel paper constituting the proceeds of the inventory. Accordingly, the purchase-money secured party may qualify for priority in the chattel paper under subsection (a) or (b), whichever is applicable, even if it does not make an additional advance against the chattel paper.

If a possessory security interest in tangible chattel paper or a perfected-by-control security interest in electronic chattel paper does not qualify for priority under this section, it may be subordinate to a perfected-by-filing security interest under section 9-322(a)(1).

4. Possession and Control. To qualify for priority under subsection (a) or (b), a purchaser must "take[ ] possession of the chattel paper or obtain[ ] control of the chattel paper under Section 9-105." When chattel paper comprises one or more tangible records and one or more electronic records, a purchaser may satisfy the possession-or-control requirement by taking possession of the tangible records under Section 9-313 and having control of the electronic records under Section 9-105. In determining which of several related records constitutes chattel paper and thus is relevant to possession or control, the form of the records is irrelevant. Rather, the touchstone is whether possession or control of the record would afford the public notice contemplated by the possession and control requirements. For example, because possession or control of an amendment extending the term of a lease would not afford the contemplated public notice, the amendment would not constitute chattel paper regardless of whether the amendment is in tangible form and the lease is in electronic form, the amendment is electronic and the lease is tangible, the amendment and lease are both tangible, or the amendment and lease are both electronic.

Two common practices have raised particular concerns with respect to the possession requirement. First, in some cases the parties create more than one copy or counterpart of chattel paper evidencing a single secured obligation or lease. This practice raises questions as to which counterpart is the "original" and whether it is necessary for a purchaser to take possession of all counterparts in order to "take possession" of the chattel paper. Second, parties sometimes enter into a single "master" agreement. The master agreement contemplates that the parties will enter into separate "schedules" from time to time, each evidencing chattel paper. Must a purchaser of an obligation or lease evidenced by a single schedule also take possession of the master agreement as well as the schedule in order to "take possession" of the chattel paper?

The problem raised by the first practice is easily solved. The parties may in the terms of their agreement and by designation on the chattel paper identify only one counterpart as the original chattel paper for purposes of taking possession of the chattel paper. Concerns about the second practice also are easily solved by careful drafting. Each schedule should provide that it incorporates the terms of the master agreement, not the other way around. This will make it clear that each schedule is a "stand alone" document.

A secured party may wish to convert tangible chattel paper to electronic chattel paper and vice versa. The priority of a security interest in chattel paper under subsection (a) or (b) may be preserved, even if the form of the chattel paper changes. The principle implied in the preceding paragraph, i.e., that not every copy of chattel paper is relevant, applies to "control" as well as to "possession." When there are multiple copies of chattel paper, a secured party may take "possession" or obtain "control" of the chattel paper if it acts with respect to the copy or copies that are reliably identified as the copy or copies that are relevant for purposes of possession or control. This principle applies as well to chattel paper that has been converted from one form to another, even if the relevant copies are not the "original" chattel paper.

5. Chattel Paper Claimed Merely as Proceeds. Subsection (a) revises the rule in former section 9-308(b) to eliminate reference to what the purchaser knows. Instead, a purchaser who meets the possession or control, ordinary course, and new value requirements takes priority over a competing security interest unless the chattel paper itself indicates that it has been assigned to an identified assignee other than the purchaser. Thus subsection (a) recognizes the common practice of placing a "legend" on chattel paper to indicate that it has been assigned. This approach, under which the chattel paper purchaser who gives new value in ordinary course can rely on possession of unlegended, tangible chattel paper without any concern for other facts that it may know, comports with the expectations of both inventory and chattel paper financers.

6. Chattel Paper Claimed Other Than Merely as Proceeds. Subsection (b) eliminates the requirement that the purchaser take without knowledge that the "specific paper" is subject to the security interest and substitutes for it the requirement that the purchaser take "without knowledge that the purchase violates the rights of the secured party." This standard derives from the definition of "buyer in ordinary course of business" in section 1-201(b)(9). The source of the purchaser's knowledge is irrelevant. Note, however, that "knowledge" means "actual knowledge." Section 1-202(b).

In contrast to a junior secured party in accounts, who may be required in some special circumstances to undertake a search under the "good faith" requirement, see comment 5 to section 9-331, a purchaser of chattel paper under this section is not required as a matter of good faith to make a search in order to determine the existence of prior security interests. There may be circumstances where the purchaser undertakes a search nevertheless, either on its own volition or because other considerations make it advisable to do so, e.g., where the purchaser also is purchasing accounts. Without more, a purchaser of chattel paper who has seen a financing statement covering the chattel paper or who knows that the chattel paper is encumbered with a security interest, does not have knowledge that its purchase violates the secured party's rights. However, if a purchaser sees a statement in a financing statement to the effect that a purchase of chattel paper from the debtor would violate the rights of the filed secured party, the purchaser would have such knowledge. Likewise, under new subsection (f), if the chattel paper itself indicates that it had been assigned to an identified secured party other than the purchaser, the purchaser would have wrongful knowledge for purposes of subsection (b), thereby preventing the purchaser from qualifying for priority under that subsection, even if the purchaser did not have actual knowledge. In the case of tangible chattel paper, the indication normally would consist of a written legend on the chattel paper. In the case of electronic chattel paper, this article leaves to developing market and technological practices the manner in which the chattel paper would indicate an assignment.

7. Instruments. Subsection (d) contains a special priority rule for instruments. Under this subsection, a purchaser of an instrument has priority over a security interest perfected by a method other than possession (e.g., by filing, temporarily under section 9-312(e) or (g), as proceeds under section 9-315(d), or automatically upon attachment under section 9-309(4) if the security interest arises out of a sale of the instrument) if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party. Generally, to the extent subsection (d) conflicts with section 3-306, subsection (d) governs. See section 3-102(b). For example, notice of a conflicting security interest precludes a purchaser from becoming a holder in due course under section 3-302 and thereby taking free of all claims to the instrument under section 3-306. However, a purchaser who takes even with knowledge of the security interest qualifies for priority under subsection (d) if it takes without knowledge that the purchase violates the rights of the holder of the security interest. Likewise, a purchaser qualifies for priority under subsection (d) if it takes for "value" as defined in section 1-201 , even if it does not take for "value" as defined in section 3-303.

Subsection (d) is subject to section 9-331(a), which provides that article 9 does not limit the rights of a holder in due course under article 3. Thus, in the rare case in which the purchaser of an instrument qualifies for priority under subsection (d), but another person has the rights of a holder in due course of the instrument, the other person takes free of the purchaser's claim. See section 3-306.

The rule in subsection (d) is similar to the rules in subsections (a) and (b), which govern priority in chattel paper. The observations in comment 6 concerning the requirement of good faith and the phrase "without knowledge that the purchase violates the rights of the secured party" apply equally to purchasers of instruments. However, unlike a purchaser of chattel paper, to qualify for priority under this section a purchaser of an instrument need only give "value" as defined in section 1-201 ; it need not give "new value." Also, the purchaser need not purchase the instrument in the ordinary course of its business.

Subsection (d) applies to checks as well as notes. For example, to collect and retain checks that are proceeds (collections) of accounts free of a senior secured party's claim to the same checks, a junior secured party must satisfy the good-faith requirement (honesty in fact and the observance of reasonable commercial standards of fair dealing) of this subsection. This is the same good-faith requirement applicable to holders in due course. See section 9-331, comment 5.

8. Priority in Proceeds of Chattel Paper. Subsection (c) sets forth the two circumstances under which the priority afforded to a purchaser of chattel paper under subsection (a) or (b) extends also to proceeds of the chattel paper. The first is if the purchaser would have priority under the normal priority rules applicable to proceeds. The second, which the following comments discuss in greater detail, is if the proceeds consist of the specific goods covered by the chattel paper. Former article 9 generally was silent as to the priority of a security interest in proceeds when a purchaser qualifies for priority under section 9-308 (but see former section 9-306(5)(b), concerning returned and repossessed goods).

9. Priority in Returned and Repossessed Goods. Returned and repossessed goods may constitute proceeds of chattel paper. The following comments explain the treatment of returned and repossessed goods as proceeds of chattel paper. The analysis is consistent with that of PEB Commentary No. 5, which these comments replace, and is based upon the following example:

Example: SP-1 has a security interest in all the inventory of a dealer in goods (Dealer); SP-1's security interest is perfected by filing. Dealer sells some of its inventory to a buyer in the ordinary course of business (BIOCOB) pursuant to a conditional sales contract (chattel paper) that does not indicate that it has been assigned to SP-1. SP-2 purchases the chattel paper from Dealer and takes possession of the paper in good faith, in the ordinary course of business, and without knowledge that the purchase violates the rights of SP-1. Subsequently, BIOCOB returns the goods to Dealer because they are defective. Alternatively, Dealer acquires possession of the goods following BIOCOB's default.

10. Assignment of Nonlease Chattel Paper.

1. Loan by SP-2 to Dealer Secured by Chattel Paper (or Functional Equivalent Pursuant to Recourse Arrangement).
   1. Returned Goods. If BIOCOB returns the goods to Dealer for repairs, Dealer is merely a bailee and acquires thereby no meaningful rights in the goods to which SP-1's security interest could attach. (Although SP-1's security interest could attach to Dealer's interest as a bailee, that interest is not likely to be of any particular value to SP-1.) Dealer is the owner of the chattel paper (i.e., the owner of a right to payment secured by a security interest in the goods); SP-2 has a security interest in the chattel paper, as does SP-1 (as proceeds of the goods under section 9-315). Under section 9-330, SP-2's security interest in the chattel paper is senior to that of SP-1. SP-2 enjoys this priority regardless of whether, or when, SP-2 filed a financing statement covering the chattel paper. Because chattel paper and goods represent different types of collateral, Dealer does not have any meaningful interest in goods to which either SP-1's or SP-2's security interest could attach in order to secure Dealer's obligations to either creditor. See section 9-102 (defining "chattel paper" and "goods").

      Now assume that BIOCOB returns the goods to Dealer under circumstances whereby Dealer once again becomes the owner of the goods. This would be the case, for example, if the goods were defective and BIOCOB was entitled to reject or revoke acceptance of the goods. See sections 2-602 (rejection), and 2-608 (revocation of acceptance). Unless BIOCOB has waived its defenses as against assignees of the chattel paper, SP-1's and SP-2's rights against BIOCOB would be subject to BIOCOB's claims and defenses. See sections 9-403 and 9-404. SP-1's security interest would attach again because the returned goods would be proceeds of the chattel paper. Dealer's acquisition of the goods easily can be characterized as "proceeds" consisting of an "in kind" collection on or distribution on account of the chattel paper. See section 9-102 (definition of "proceeds"). Assuming that SP-1's security interest is perfected by filing against the goods and that the filing is made in the same office where a filing would be made against the chattel paper, SP-1's security interest in the goods would remain perfected beyond the 20-day period of automatic perfection. See section 9-315(d).

      Because Dealer's newly reacquired interest in the goods is proceeds of the chattel paper, SP-2's security interest also would attach in the goods as proceeds. If SP-2 had perfected its security interest in the chattel paper by filing (again, assuming that filing against the chattel paper was made in the same office where a filing would be made against the goods), SP-2's security interest in the reacquired goods would be perfected beyond 20 days. See section 9-315(d). However, if SP-2 had relied only on its possession of the chattel paper for perfection and had not filed against the chattel paper or the goods, SP-2's security interest would be unperfected after the 20-day period. See section 9-315(d). Nevertheless, SP-2's unperfected security interest in the goods would be senior to SP-1's security interest under section 9-330(c). The result in this priority contest is not affected by SP-2's acquiescence or non-acquiescence in the return of the goods to Dealer.

   2. Repossessed Goods. As explained above, Dealer owns the chattel paper covering the goods, subject to security interests in favor of SP-1 and SP-2. In article 9 parlance, Dealer has an interest in chattel paper, not goods. If Dealer, SP-1, or SP-2 repossesses the goods upon BIOCOB's default, whether the repossession is rightful or wrongful as among Dealer, SP-1, or SP-2, Dealer's interest will not change. The location of goods and the party who possesses them does not affect the fact that Dealer's interest is in chattel paper, not goods. The goods continue to be owned by BIOCOB. SP-1's security interest in the goods does not attach until such time as Dealer reacquires an interest (other than a bare possessory interest) in the goods. For example, Dealer might buy the goods at a foreclosure sale from SP-2 (whose security interest in the chattel paper is senior to that of SP-1); that disposition would cut off BIOCOB's rights in the goods. Section 9-617.

      In many cases the matter would end upon sale of the goods to Dealer at a foreclosure sale and there would be no priority contest between SP-1 and SP-2; Dealer would be unlikely to buy the goods under circumstances whereby SP-2 would retain its security interest. There can be exceptions, however. For example, Dealer may be obliged to purchase the goods from SP-2 and SP-2 may be obliged to convey the goods to Dealer, but Dealer may fail to pay SP-2. Or, one could imagine that SP-2, like SP-1, has a general security interest in the inventory of Dealer. In the latter case, SP-2 should not receive the benefit of any special priority rule, since its interest in no way derives from priority under section 9-330. In the former case, SP-2's security interest in the goods reacquired by Dealer is senior to SP-1's security interest under section 9-330.

2. Dealer's Outright Sale of Chattel Paper to SP-2. Article 9 also applies to a transaction whereby SP-2 buys the chattel paper in an outright sale transaction without recourse against Dealer. Sections 1-201 (37) and 9-109(a). Although Dealer does not, in such a transaction, retain any residual ownership interest in the chattel paper, the chattel paper constitutes proceeds of the goods to which SP-1's security interest will attach and continue following the sale of the goods. Section 9-315(a)(1). Even though Dealer has not retained any interest in the chattel paper, as discussed above BIOCOB subsequently may return the goods to Dealer under circumstances whereby Dealer reacquires an interest in the goods. The priority contest between SP-1 and SP-2 will be resolved as discussed above; section 9-330 makes no distinction among purchasers of chattel paper on the basis of whether the purchaser is an outright buyer of chattel paper or one whose security interest secures an obligation of Dealer. 11. Assignment of Lease Chattel Paper. As defined in section 9-102, "chattel paper" includes not only writings that evidence security interests in specific goods but also those that evidence true leases of goods. The analysis with respect to lease chattel paper is similar to that set forth above with respect to nonlease chattel paper. It is complicated, however, by the fact that, unlike the case of chattel paper arising out of a sale, Dealer retains a residual interest in the goods. See section 2A-103(1)(q) (defining "lessor's residual interest"); In re Leasing Consultants, Inc., 486 F.2d 367 (2d Cir. 1973) (lessor's residual interest under true lease is an interest in goods and is a separate type of collateral from lessor's interest in the lease). If Dealer leases goods to a "lessee in ordinary course of business" (LIOCOB), then LIOCOB takes its interest under the lease (i.e., its "leasehold interest") free of the security interest of SP-1. See section 2A-103(1)(m) (defining "leasehold interest") and (1)(o) (defining "lessee in ordinary course of business") and section 2A-307(3). SP-1 would, however, retain its security interest in the residual interest. In addition, SP-1 would acquire an interest in the lease chattel paper as proceeds. If Dealer then assigns the lease chattel paper to SP-2, section 9-330 gives SP-2 priority over SP-1 with respect to the chattel paper, but not with respect to the residual interest in the goods. Consequently, assignees of lease chattel paper typically take a security interest in and file against the lessor's residual interest in goods, expecting their priority in the goods to be governed by the first-to-file-or-perfect rule of section 9-322. If the goods are returned to Dealer, other than upon expiration of the lease term, then the security interests of both SP-1 and SP-2 normally would attach to the goods as proceeds of the chattel paper. (If the goods are returned to Dealer at the expiration of the lease term and the lessee has made all payments due under the lease, however, then Dealer no longer has any rights under the chattel paper. Dealer's interest in the goods consists solely of its residual interest, as to which SP-2 has no claim.) This would be the case, for example, when the lessee rescinds the lease or when the lessor recovers possession in the exercise of its remedies under article 2A. See, e.g., section 2A-525. If SP-2 enjoyed priority in the chattel paper under section 9-330, then SP-2 likewise would enjoy priority in the returned goods as proceeds. This does not mean that SP-2 necessarily is entitled to the entire value of the returned goods. The value of the goods represents the sum of the present value of (i) the value of their use for the term of the lease and (ii) the value of the residual interest. SP-2 has priority in the former, but SP-1 ordinarily would have priority in the latter. Thus, an allocation of a portion of the value of the goods to each component may be necessary. Where, as here, one secured party has a security interest in the lessor's residual interest and another has a priority security interest in the chattel paper, it may be advisable for the conflicting secured parties to establish a method for making such an allocation and otherwise to determine their relative rights in returned goods by agreement.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-309.

2. "Priority." In some provisions, this article distinguishes between claimants that take collateral free of a security interest (in the sense that the security interest no longer encumbers the collateral) and those that take an interest in the collateral that is senior to a surviving security interest. See, e.g., section 9-317. Whether a holder or purchaser referred to in this section takes free or is senior to a security interest depends on whether the purchaser is a buyer of the collateral or takes a security interest in it. The term "priority" is meant to encompass both scenarios, as it does in section 9-330.

3. Rights Acquired by Purchasers. The rights to which this section refers are set forth in sections 3-305 and 3-306 (holder in due course), 7-502 (holder to whom a negotiable document of title has been duly negotiated), and 8-303 (protected purchaser). The holders and purchasers referred to in this section do not always take priority over a security interest. See, e.g., section 7-503 (affording paramount rights to certain owners and secured parties as against holder to whom a negotiable document of title has been duly negotiated). Accordingly, this section adds the clause, "to the extent provided in articles 3, 7, and 8" to former section 9-309.

4. Financial Assets and Security Entitlements. New subsection (b) provides explicit protection for those who deal with financial assets and security entitlements and who are immunized from liability under article 8. See, e.g., sections 8-502, 8-503(e), 8-510, and 8-511. The new subsection makes explicit in article 9 what is implicit in former article 9 and explicit in several provisions of article 8. It does not change the law.

5. Collections by Junior Secured Party. Under this section, a secured party with a junior security interest in receivables (accounts, chattel paper, promissory notes, or payment intangibles) may collect and retain the proceeds of those receivables free of the claim of a senior secured party to the same receivables, if the junior secured party is a holder in due course of the proceeds. In order to qualify as a holder in due course, the junior must satisfy the requirements of section 3-302, which include taking in "good faith." This means that the junior not only must act "honestly" but also must observe "reasonable commercial standards of fair dealing" under the particular circumstances. See section 9-102(a). Although "good faith" does not impose a general duty of inquiry, e.g., a search of the records in filing offices, there may be circumstances in which "reasonable commercial standards of fair dealing" would require such a search.

Consider, for example, a junior secured party in the business of financing or buying accounts who fails to undertake a search to determine the existence of prior security interests. Because a search, under the usages of trade of that business, would enable it to know or learn upon reasonable inquiry that collecting the accounts violated the rights of a senior secured party, the junior may fail to meet the good-faith standard. See Utility Contractors Financial Services, Inc. v. Amsouth Bank, NA, 985 F.2d 1554 (11th Cir. 1993). Likewise, a junior secured party who collects accounts when it knows or should know under the particular circumstances that doing so would violate the rights of a senior secured party, because the debtor had agreed not to grant a junior security interest in, or sell, the accounts, may not meet the good-faith test. Thus, if a junior secured party conducted or should have conducted a search and a financing statement filed on behalf of the senior secured party states such a restriction, the junior's collection would not meet the good-faith standard. On the other hand, if there was a course of performance between the senior secured party and the debtor which placed no such restrictions on the debtor and allowed the debtor to collect and use the proceeds without any restrictions, the junior secured party may then satisfy the requirements for being a holder in due course. This would be more likely in those circumstances where the junior secured party was providing additional financing to the debtor on an on-going basis by lending against or buying the accounts and had no notice of any restrictions against doing so. Generally, the senior secured party would not be prejudiced because the practical effect of such payment to the junior secured party is little different than if the debtor itself had made the collections and subsequently paid the secured party from the debtor's general funds. Absent collusion, the junior secured party would take the funds free of the senior security interests. See section 9-332. In contrast, the senior secured party is likely to be prejudiced if the debtor is going out of business and the junior secured party collects the accounts by notifying the account debtors to make payments directly to the junior. Those collections may not be consistent with "reasonable commercial standards of fair dealing."

Whether the junior secured party qualifies as a holder in due course is fact-sensitive and should be decided on a case-by-case basis in the light of those circumstances. Decisions such as Financial Management Services Inc. v. Familian, 905 P.2d 506 (Ariz. App. Div. 1995) (finding holder in due course status) could be determined differently under this application of the good-faith requirement.

The concepts addressed in this comment are also applicable to junior secured parties as purchasers of instruments under section 9-330(d). See section 9-330, comment 7.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Scope of This Section. This section affords broad protection to transferees who take funds from a deposit account and to those who take money. The term "transferee" is not defined; however, the debtor itself is not a transferee. Thus this section does not cover the case in which a debtor withdraws money (currency) from its deposit account or the case in which a bank debits an encumbered account and credits another account it maintains for the debtor.

A transfer of funds from a deposit account, to which subsection (b) applies, normally will be made by check, by funds transfer, or by debiting the debtor's deposit account and crediting another depositor's account.

Example 1: Debtor maintains a deposit account with Bank A. The deposit account is subject to a perfected security interest in favor of Lender. Debtor draws a check on the account, payable to Payee. Inasmuch as the check is not the proceeds of the deposit account (it is an order to pay funds from the deposit account), Lender's security interest in the deposit account does not give rise to a security interest in the check. Payee deposits the check into its own deposit account, and Bank A pays it. Unless Payee acted in collusion with Debtor in violating Lender's rights, Payee takes the funds (the credits running in favor of Payee) free of Lender's security interest. This is true regardless of whether Payee is a holder in due course of the check and even if Payee gave no value for the check.

Example 2: Debtor maintains a deposit account with Bank A. The deposit account is subject to a perfected security interest in favor of Lender. At Bank B's suggestion, Debtor moves the funds from the account at Bank A to Debtor's deposit account with Bank B. Unless Bank B acted in collusion with Debtor in violating Lender's rights, Bank B takes the funds (the credits running in favor of Bank B) free from Lender's security interest. See subsection (b). However, inasmuch as the deposit account maintained with Bank B constitutes the proceeds of the deposit account at Bank A, Lender's security interest would attach to that account as proceeds. See section 9-315.

Subsection (b) also would apply if, in the example, Bank A debited Debtor's deposit account in exchange for the issuance of Bank A's cashier's check. Lender's security interest would attach to the cashier's check as proceeds of the deposit account, and the rules applicable to instruments would govern any competing claims to the cashier's check. See, e.g., sections 3-306, 9-322, 9-330, and 9-331.

If Debtor withdraws money (currency) from an encumbered deposit account and transfers the money to a third party, then subsection (a), to the extent not displaced by federal law relating to money, applies. It contains the same rule as subsection (b).

Subsection (b) applies to transfers of funds from a deposit account; it does not apply to transfers of the deposit account itself or of an interest therein. For example, this section does not apply to the creation of a security interest in a deposit account. Competing claims to the deposit account itself are dealt with by other article 9 priority rules. See sections 9-317(a), 9-327, 9-340, and 9-341. Similarly, a corporate merger normally would not result in a transfer of funds from a deposit account. Rather, it might result in a transfer of the deposit account itself. If so, the normal rules applicable to transferred collateral would apply; this section would not.

3. Policy. Broad protection for transferees helps to ensure that security interests in deposit accounts do not impair the free flow of funds. It also minimizes the likelihood that a secured party will enjoy a claim to whatever the transferee purchases with the funds. Rules concerning recovery of payments traditionally have placed a high value on finality. The opportunity to upset a completed transaction, or even to place a completed transaction in jeopardy by bringing suit against the transferee of funds, should be severely limited. Although the giving of value usually is a prerequisite for receiving the ability to take free from third-party claims, where payments are concerned the law is even more protective. Thus, section 3-418(c) provides that, even where the law of restitution otherwise would permit recovery of funds paid by mistake, no recovery may be had from a person "who in good faith changed position in reliance on the payment." Rather than adopt this standard, this section eliminates all reliance requirements whatsoever. Payments made by mistake are relatively rare, but payments of funds from encumbered deposit accounts (e.g., deposit accounts containing collections from accounts receivable) occur with great regularity. In most cases, unlike payment by mistake, no one would object to these payments. In the vast proportion of cases, the transferee probably would be able to show a change of position in reliance on the payment. This section does not put the transferee to the burden of having to make this proof.

4. "Bad Actors." To deal with the question of the "bad actor," this section borrows "collusion" language from article 8. See, e.g., Sections 8-115 and 8-503(e). This is the most protective (i.e., least stringent) of the various standards now found in the UCC. Compare, e.g., Section 1-201(b)(9) ("without knowledge that the sale violates the rights of another person"); Ssection 1-201(b)(20) ("honesty in fact and the observance of reasonable commercial standards of fair dealing"); and Section 3-302(a)(2)(v) ("without notice of any claim").

5. Transferee Who Does Not Take Free. This section sets forth the circumstances under which certain transferees of money or funds take free of security interests. It does not determine the rights of a transferee who does not take free of a security interest.

Example 3: The facts are as in example 2, but, in wrongfully moving the funds from the deposit account at Bank A to Debtor's deposit account with Bank B, Debtor acts in collusion with Bank B. Bank B does not take the funds free of Lender's security interest under this section. If Debtor grants a security interest to Bank B, section 9-327 governs the relative priorities of Lender and Bank B. Under section 9-327(3), Bank B's security interest in the Bank B deposit account is senior to Lender's security interest in the deposit account as proceeds. However, Bank B's senior security interest does not protect Bank B against any liability to Lender that might arise from Bank B's wrongful conduct.

CASE NOTES

The limitation of § 43-33 is an effective provision fixing the priority between a lien for repairs and one of the listed encumbrances otherwise than is provided by this section. Except for the $75.00 statutory amount, § 43-33 places the lien for repairs in inferior position to that occupied by the encumbrance on the property. Checkered Flag Motor Car Co. v. Grulke, 209 Va. 427 , 164 S.E.2d 660 (1968) (decided under prior law).

Priority of liens established by former § 46.1-73. - The adoption of the Uniform Commercial Code was not intended to affect the priority of liens with respect to motor vehicles established by former § 46.1-73. Checkered Flag Motor Car Co. v. Grulke, 209 Va. 427 , 164 S.E.2d 660 (1968) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-310.

2. "Possessory Liens." This section governs the relative priority of security interests arising under this article and "possessory liens," i.e., common-law and statutory liens whose effectiveness depends on the lienor's possession of goods with respect to which the lienor provided services or furnished materials in the ordinary course of its business. As under former section 9-310, the possessory lien has priority over a security interest unless the possessory lien is created by a statute that expressly provides otherwise. If the statute creating the possessory lien is silent as to its priority relative to a security interest, this section provides a rule of interpretation that the possessory lien takes priority, even if the statute has been construed judicially to make the possessory lien subordinate.

CASE NOTES

Electrical supplies held not fixtures. - Electrical supplies to be installed in a school under construction had not become fixtures, as defined by this section, at the time the electrical contractor's creditor bank sought to take possession thereof, and thus the creditor need not have filed its financing statement as a fixture filing under former § 8.9-401 (1) (b). Where the bank made a proper filing under former § 8.9-401 (1) (c), the bank thus acquired a perfected security interest in the electrical supplies.(decided under former Title 8.9) Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844 , 263 S.E.2d 408 (1980).

Priority generally. - Since creditor complied with the filing requirements of §§ 8.9A-310 (a) and 8.9A-501 (a)(2) to perfect its security interest in the tenants' crops, its security interest took precedent pursuant to § 8.9A-334 (i) over the landlord's unperfected interest in the crops; therefore, the court granted the creditors' summary judgment motion on the issue of creditor priority. Dean v. Hall,, 2003 U.S. Dist. LEXIS 12720 (E.D. Va. Feb. 25, 2003).

No security interest. - Creditor did not have a secured claim under the terms of the parties' agreements when read together. But even if the security terms in a credit application controlled, a lien was not available under § 8.9A-334(a) , because the siding and windows purchased were incorporated into the structure and no security interest was retained. In re Vincent, 468 Bankr. 802, 2012 Bankr. LEXIS 817 (Bankr. E.D. Va. 2012).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-313.

2. Scope of This Section. This section contains rules governing the priority of security interests in fixtures and crops as against persons who claim an interest in real property. Priority contests with other article 9 security interests are governed by the other priority rules of this article. The provisions with respect to fixtures follow those of former section 9-313. However, they have been rewritten to conform to section 2A-309 and to prevailing style conventions. Subsections (i) and (j), which apply to crops, are new.

3. Security Interests in Fixtures. Certain goods that are the subject of personal-property (chattel) financing become so affixed or otherwise so related to real property that they become part of the real property. These goods are called "fixtures." See section 9-102 (definition of "fixtures"). Some fixtures retain their personal property nature: A security interest under this article may be created in fixtures and may continue in goods that become fixtures. See subsection (a). However, if the goods are ordinary building materials incorporated into an improvement on land, no security interest in them exists. Rather, the priority of claims to the building materials are determined by the law governing claims to real property. (Of course, the fact that no security interest exists in ordinary building materials incorporated into an improvement on land does not prejudice any rights the secured party may have against the debtor or any other person who violated the secured party's rights by wrongfully incorporating the goods into real property.)

Thus, this section recognizes three categories of goods: (1) Those that retain their chattel character entirely and are not part of the real property; (2) ordinary building materials that have become an integral part of the real property and cannot retain their chattel character for purposes of finance; and (3) an intermediate class that has become real property for certain purposes, but as to which chattel financing may be preserved.

To achieve priority under certain provisions of this section, a security interest must be perfected by making a "fixture filing" (defined in section 9-102) in the real property records. Because the question whether goods have become fixtures often is a difficult one under applicable real property law, a secured party may make a fixture filing as a precaution. Courts should not infer from a fixture filing that the secured party concedes that the goods are or will become fixtures.

4. Priority in Fixtures: General. In considering priority problems under this section, one must first determine whether real property claimants per se have an interest in the crops or fixtures as part of real property. If not, it is immaterial, so far as concerns real property parties as such, whether a security interest arising under this article is perfected or unperfected. In no event does a real property claimant (e.g., owner or mortgagee) acquire an interest in a "pure" chattel just because a security interest therein is unperfected. If on the other hand real property law gives real property parties an interest in the goods, a conflict arises and this section states the priorities.

5. Priority in Fixtures: Residual Rule. Subsection (c) states the residual priority rule, which applies only if one of the other rules does not: A security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor.

6. Priority in Fixtures: First to File or Record. Subsection (e)(1), which follows former section 9-313(4)(b), contains the usual priority rule of conveyancing, that is, the first to file or record prevails. In order to achieve priority under this rule, however, the security interest must be perfected by a "fixture filing" (defined in section 9-102), i.e., a filing for record in the real property records and indexed therein, so that it will be found in a real property search. The condition in subsection (e)(1)(B), that the security interest must have had priority over any conflicting interest of a predecessor in title of the conflicting encumbrancer or owner, appears to limit to the first-in-time principle. However, this apparent limitation is nothing other than an expression of the usual rule that a person must be entitled to transfer what he or she has. Thus, if the fixture security interest is subordinate to a mortgage, it is subordinate to an interest of an assignee of the mortgage, even though the assignment is a later recorded instrument. Similarly if the fixture security interest is subordinate to the rights of an owner, it is subordinate to a subsequent grantee of the owner and likewise subordinate to a subsequent mortgagee of the owner.

7. Priority in Fixtures: Purchase-Money Security Interests. Subsection (d), which follows former section 9-313(4)(a), contains the principal exception to the first-to-file-or-record rule of subsection (e)(1). It affords priority to purchase-money security interests in fixtures as against prior recorded real property interests, provided that the purchase-money security interest is filed as a fixture filing in the real property records before the goods become fixtures or within 20 days thereafter. This priority corresponds to the purchase-money priority under section 9-324(a). (Like other 10-day periods in former article 9, the 10-day period in this section has been changed to 20 days.)

It should be emphasized that this purchase-money priority with the 20-day grace period for filing is limited to rights against real property interests that arise before the goods become fixtures. There is no such priority with the 20-day grace period as against real property interests that arise subsequently. The fixture security interest can defeat subsequent real property interests only if it is filed first and prevails under the usual conveyancing rule in subsection (e)(1) or one of the other rules in this section.

8. Priority in Fixtures: Readily Removable Goods. Subsection (e)(2), which derives from section 2A-309 and former section 9-313(4)(d), contains another exception to the usual first-to-file-or-perfect rule. It affords priority to the holders of security interests in certain types of readily removable goods - factory and office machines, equipment that is not primarily used or leased for use in the operation of the real property, and (as discussed below) certain replacements of domestic appliances. This rule is made necessary by the confusion in the law as to whether certain machinery, equipment, and appliances become fixtures. It protects a secured party who, perhaps in the mistaken belief that the readily removable goods will not become fixtures, makes a UCC filing (or otherwise perfects under this article) rather than making a fixture filing.

Frequently, under applicable law, goods of the type described in subsection (e)(2) will not be considered to have become part of the real property. In those cases, the fixture security interest does not conflict with a real property interest, and resort to this section is unnecessary. However, if the goods have become part of the real property, subsection (e)(2) enables a fixture secured party to take priority over a conflicting real-property interest if the fixture security interest is perfected by a fixture filing or by any other method permitted by this article. If perfection is by fixture filing, the fixture security interest would have priority over subsequently recorded real property interests under subsection (e)(1) and, if the fixture security interest is a purchase-money security interest (a likely scenario), it would also have priority over most real property interests under the purchase-money priority of subsection (d). Note, however, that unlike the purchase-money priority rule in subsection (d), the priority rules in subsection (e) override the priority given to a construction mortgage under subsection (h).

The rule in subsection (e)(2) is limited to readily removable replacements of domestic appliances. It does not apply to original installations. Moreover, it is limited to appliances that are "consumer goods" (defined in section 9-102) in the hands of the debtor. The principal effect of the rule is to make clear that a secured party financing occasional replacements of domestic appliances in noncommercial, owner-occupied contexts need not concern itself with real-property descriptions or records; indeed, for a purchase-money replacement of consumer goods, perfection without any filing will be possible. See section 9-309(1).

9. Priority in Fixtures: Judicial Liens. Subsection (e)(3), which follows former section 9-313(4)(d), adopts a first-in-time rule applicable to conflicts between a fixture security interest and a lien on the real property obtained by legal or equitable proceedings. Such a lien is subordinate to an earlier-perfected security interest, regardless of the method by which the security interest was perfected. Judgment creditors generally are not reliance creditors who search real property records. Accordingly, a perfected fixture security interest takes priority over a subsequent judgment lien or other lien obtained by legal or equitable proceedings, even if no evidence of the security interest appears in the relevant real property records. Subsection (e)(3) thus protects a perfected fixture security interest from avoidance by a trustee in bankruptcy under Bankruptcy Code section 544(a), regardless of the method of perfection.

10. Priority in Fixtures: Manufactured Homes. A manufactured home may become a fixture. New subsection (e)(4) contains a special rule granting priority to certain security interests created in a "manufactured home" as part of a "manufactured-home transaction" (both defined in section 9-102). Under this rule, a security interest in a manufactured home that becomes a fixture has priority over a conflicting interest of an encumbrancer or owner of the real property if the security interest is perfected under a certificate of title statute (see section 9-311). Subsection (e)(4) is only one of the priority rules applicable to security interests in a manufactured home that becomes a fixture. Thus, a security interest in a manufactured home which does not qualify for priority under this subsection may qualify under another.

11. Priority in Fixtures: Construction Mortgages. The purchase-money priority presents a difficult problem in relation to construction mortgages. The latter ordinarily will have been recorded even before the commencement of delivery of materials to the job, and therefore would take priority over fixture security interests were it not for the purchase-money priority. However, having recorded first, the holder of a construction mortgage reasonably expects to have first priority in the improvement built using the mortgagee's advances. Subsection (g) expressly gives priority to the construction mortgage recorded before the filing of the purchase-money security interest in fixtures. A refinancing of a construction mortgage has the same priority as the construction mortgage itself. The phrase "an obligation incurred for the construction of an improvement" covers both optional advances and advances pursuant to commitment. Both types of advances have the same priority under subsection (g).

The priority under this subsection applies only to goods that become fixtures during the construction period leading to the completion of the improvement. The construction priority will not apply to additions to the building made long after completion of the improvement, even if the additions are financed by the real property mortgagee under an open-end clause of the construction mortgage. In such case, subsections (d), (e), and (f) govern.

Although this subsection affords a construction mortgage priority over a purchase-money security interest that otherwise would have priority under subsection (d), the subsection is subject to the priority rules in subsections (e) and (f). Thus, a construction mortgage may be junior to a fixture security interest perfected by a fixture filing before the construction mortgage was recorded. See subsection (e)(1).

12. Crops. Growing crops are "goods" in which a security interest may be created and perfected under this article. In some jurisdictions, a mortgage of real property may cover crops, as well. In the event that crops are encumbered by both a mortgage and an article 9 security interest, subsection (i) provides that the security interest has priority. States whose real property law provides otherwise should either amend that law directly or override it by enacting subsection (j).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-314.

2. "Accession." This section applies to an "accession," as defined in section 9-102, regardless of the cost or difficulty of removing the accession from the other goods, and regardless of whether the original goods have come to form an integral part of the other goods. This section does not apply to goods whose identity has been lost. Goods of that kind are "commingled goods" governed by section 9-336. Neither this section nor the following one addresses the case of collateral that changes form without the addition of other goods.

3. "Accession" vs. "Other Goods." This section distinguishes among the "accession," the "other goods," and the "whole." The last term refers to the combination of the "accession" and the "other goods." If one person's collateral becomes physically united with another person's collateral, each is an "accession."

Example 1: SP-1 holds a security interest in the debtor's tractors (which are not subject to a certificate of title statute), and SP-2 holds a security interest in a particular tractor engine. The engine is installed in a tractor. From the perspective of SP-1, the tractor becomes an "accession" and the engine is the "other goods." From the perspective of SP-2, the engine is the "accession" and the tractor is the "other goods." The completed tractor - tractor cum engine - constitutes the "whole."

4. Scope. This section governs only a few issues concerning accessions. Subsection (a) contains rules governing continuation of a security interest in an accession. Subsection (b) contains a rule governing continued perfection of a security interest in goods that become an accession. Subsection (d) contains a special priority rule governing accessions that become part of a whole covered by a certificate of title. Subsections (e) and (f) govern enforcement of a security interest in an accession.

5. Matters Left to Other Provisions of This Article: Attachment and Perfection. Other provisions of this article often govern accession-related issues. For example, this section does not address whether a secured party acquires a security interest in the whole if its collateral becomes an accession. Normally this will turn on the description of the collateral in the security agreement.

Example 2: Debtor owns a computer subject to a perfected security interest in favor of SP-1. Debtor acquires memory and installs it in the computer. Whether SP-1's security interest attaches to the memory depends on whether the security agreement covers it.

Similarly, this section does not determine whether perfection against collateral that becomes an accession is effective to perfect a security interest in the whole. Other provisions of this article, including the requirements for indicating the collateral covered by a financing statement, resolve that question.

6. Matters Left to Other Provisions of This Article: Priority. With one exception, concerning goods covered by a certificate of title (see subsection (d)), the other provisions of this part, including the rules governing purchase-money security interests, determine the priority of most security interests in an accession, including the relative priority of a security interest in an accession and a security interest in the whole. See subsection (c).

Example 3: Debtor owns an office computer subject to a security interest in favor of SP-1. Debtor acquires memory and grants a perfected security interest in the memory to SP-2. Debtor installs the memory in the computer, at which time (one assumes) SP-1's security interest attaches to the memory. The first-to-file-or-perfect rule of section 9-322 governs priority in the memory. If, however, SP-2's security interest is a purchase-money security interest, section 9-324(a) would afford priority in the memory to SP-2, regardless of which security interest was perfected first.

7. Goods Covered by Certificate of Title. This section does govern the priority of a security interest in an accession that is or becomes part of a whole that is subject to a security interest perfected by compliance with a certificate of title statute. Subsection (d) provides that a security interest in the whole, perfected by compliance with a certificate of title statute, takes priority over a security interest in the accession. It enables a secured party to rely upon a certificate of title without having to check the UCC files to determine whether any components of the collateral may be encumbered. The subsection imposes a corresponding risk upon those who finance goods that may become part of goods covered by a certificate of title. In doing so, it reverses the priority that appeared reasonable to most pre-UCC courts.

Example 4: Debtor owns an automobile subject to a security interest in favor of SP-1. The security interest is perfected by notation on the certificate of title. Debtor buys tires subject to a perfected-by-filing purchase-money security interest in favor of SP-2 and mounts the tires on the automobile's wheels. If the security interest in the automobile attaches to the tires, then SP-1 acquires priority over SP-2. The same result would obtain if SP-1's security interest attached to the automobile and was perfected after the tires had been mounted on the wheels.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-315.

2. "Commingled Goods." Subsection (a) defines "commingled goods." It is meant to include not only goods whose identity is lost through manufacturing or production (e.g., flour that has become part of baked goods) but also goods whose identity is lost by commingling with other goods from which they cannot be distinguished (e.g., ball bearings).

3. Consequences of Becoming "Commingled Goods." By definition, the identity of the original collateral cannot be determined once the original collateral becomes commingled goods. Consequently, the security interest in the specific original collateral alone is lost once the collateral becomes commingled goods, and no security interest in the original collateral can be created thereafter except as a part of the resulting product or mass. See subsection (b).

Once collateral becomes commingled goods, the secured party's security interest is transferred from the original collateral to the product or mass. See subsection (c). If the security interest in the original collateral was perfected, the security interest in the product or mass is a perfected security interest. See subsection (d). This perfection continues until lapse.

4. Priority of Perfected Security Interests That Attach Under This Section. This section governs the priority of competing security interests in a product or mass only when both security interests arise under this section. In that case, if both security interests are perfected by operation of this section (see subsections (c) and (d)), then the security interests rank equally, in proportion to the value of the collateral at the time it became commingled goods. See subsection (f)(2).

Example 1: SP-1 has a perfected security interest in Debtor's eggs, which have a value of $300 and secure a debt of $400, and SP-2 has a perfected security interest in Debtor's flour, which has a value of $500 and secures a debt of $600. Debtor uses the flour and eggs to make cakes, which have a value of $1000. The two security interests rank equally and share in the ratio of 3:5. Applying this ratio to the entire value of the product, SP-1 would be entitled to $375 (i.e., 3/8 x $1000), and SP-2 would be entitled to $625 (i.e., 5/8 x $1000).

Example 2: Assume the facts of Example 1, except that SP-1's collateral, worth $300, secures a debt of $200. Recall that, if the cake is worth $1000, then applying the ratio of 3:5 would entitle SP-1 to $375 and SP-2 to $625. However, SP-1 is not entitled to collect from the product more than it is owed. Accordingly, SP-1's share would be only $200, SP-2 would receive the remaining value, up to the amount it is owed ($600).

Example 3: Assume that the cakes in the previous examples have a value of only $600. Again, the parties share in the ratio of 3:5. If, as in Example 1, SP-1 is owed $400, then SP-1 is entitled to $225 (i.e., 3/8 x $600), and SP-2 is entitled to $375 (i.e., 5/8 x $600). Debtor receives nothing. If, however, as in Example 2, SP-1 is owed only $200, then SP-2 receives $400.

The results in the foregoing examples remain the same, regardless of whether SP-1 or SP-2 (or each) has a purchase-money security interest.

5. Perfection: Unperfected Security Interests. The rule explained in the preceding comment applies only when both security interests in original collateral are perfected when the goods become commingled goods. If a security interest in original collateral is unperfected at the time the collateral becomes commingled goods, subsection (f)(1) applies.

Example 4: SP-1 has a perfected security interest in the debtor's eggs, and SP-2 has an unperfected security interest in the debtor's flour. Debtor uses the flour and eggs to make cakes. Under subsection (c), both security interests attach to the cakes. But since SP-1's security interest was perfected at the time of commingling and SP-2's was not, only SP-1's security interest in the cakes is perfected. See subsection (d). Under subsection (f)(1) and section 9-322(a)(2), SP-1's perfected security interest has priority over SP-2's unperfected security interest.

If both security interests are unperfected, the rule of section 9-322(a)(3) would apply.

6. Multiple Security Interests. On occasion, a single input may be encumbered by more than one security interest. In those cases, the multiple secured parties should be treated like a single secured party for purposes of determining their collective share under subsection (f)(2). The normal priority rules would determine how that share would be allocated between them. Consider the following example, which is a variation on Example 1 above:

Example 5: SP-1A has a perfected, first-priority security interest in Debtor's eggs. SP-1B has a perfected, second-priority security interest in the same collateral. The eggs have a value of $300. Debtor owes $200 to SP-1A and $200 to SP-1B. SP-2 has a perfected security interest in Debtor's flour, which has a value of $500 and secures a debt of $600. Debtor uses the flour and eggs to make cakes, which have a value of $1000.

For purposes of subsection (f)(2), SP-1A and SP-1B should be treated like a single secured party. The collective security interest would rank equally with that of SP-2. Thus, the secured parties would share in the ratio of 3 (for SP-1A and SP-1B combined) to 5 (for SP-2). Applying this ratio to the entire value of the product, SP-1A and SP-1B in the aggregate would be entitled to $375 (i.e., 3/8 x $1000), and SP-2 would be entitled to $625 (i.e., 5/8 x $1000).

SP-1A and SP-1B would share the $375 in accordance with their priority, as established under other rules. Inasmuch as SP-1A has first priority, it would receive $200, and SP-1B would receive $175.

7. Priority of Security Interests That Attach Other Than by Operation of This Section. Under subsection (e), the normal priority rules determine the priority of a security interest that attaches to the product or mass other than by operation of this section. For example, assume that SP-1 has a perfected security interest in Debtor's existing and after-acquired baked goods, and SP-2 has a perfected security interest in Debtor's flour. When the flour is processed into cakes, subsections (c) and (d) provide that SP-2 acquires a perfected security interest in the cakes. If SP-1 filed against the baked goods before SP-2 filed against the flour, then SP-1 will enjoy priority in the cakes. See section 9-322 (first-to-file-or-perfect). But if SP-2 filed against the flour before SP-1 filed against the baked goods, then SP-2 will enjoy priority in the cakes to the extent of its security interest.

OFFICIAL COMMENT

Comment. - 1. Source. Derived from former section 9-103(2)(d).

2. Protection for Buyers and Secured Parties. This section affords protection to certain good-faith purchasers for value who are likely to have relied on a "clean" certificate of title, i.e., one that neither shows that the goods are subject to a particular security interest nor contains a statement that they may be subject to security interests not shown on the certificate. Under this section, a buyer can take free of, and the holder of a conflicting security interest can acquire priority over, a security interest that is perfected by any method under the law of another jurisdiction. The fact that the security interest has been reperfected by possession under section 9-313 does not of itself disqualify the holder of a conflicting security interest from protection under paragraph (2).

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Effect of Incorrect Information in Financing Statement. Section 9-520(a) requires the filing office to reject financing statements that do not contain information concerning the debtor as specified in section 9-516(b)(5). An error in this information does not render the financing statement ineffective. On rare occasions, a subsequent purchaser of the collateral (i.e., a buyer or secured party) may rely on the misinformation to its detriment. This section subordinates a security interest or agricultural lien perfected by an effective, but flawed, financing statement to the rights of a buyer or holder of a perfected security interest to the extent that, in reasonable reliance on the incorrect information, the purchaser gives value and, in the case of tangible collateral, receives delivery of the collateral. A purchaser who has not made itself aware of the information in the filing office with respect to the debtor cannot act in "reasonable reliance" upon incorrect information.

3. Relationship to Section 9-507. This section applies to financing statements that contain information that is incorrect at the time of filing and imposes a small risk of subordination on the filer. In contrast, Section 9-507 deals with financing statements containing information that is correct at the time of filing but which becomes incorrect later. Except as provided in Section 9-507 with respect to changes in the name that is sufficient as the name of the debtor under Section 9-503(a), an otherwise effective financing statement does not become ineffective if the information contained in it becomes inaccurate.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-316.

2. Subordination by Agreement. The preceding sections deal elaborately with questions of priority. This section makes it entirely clear that a person entitled to priority may effectively agree to subordinate its claim. Only the person entitled to priority may make such an agreement: A person's rights cannot be adversely affected by an agreement to which the person is not a party.

SubPart 4. Rights of Bank.

OFFICIAL COMMENT

Comment. - 1. Source. New; subsection (b) is based on a nonuniform Illinois amendment.

2. Set-off vs. Security Interest. This section resolves the conflict between a security interest in a deposit account and the bank's rights of recoupment and set-off.

Subsection (a) states the general rule and provides that the bank may effectively exercise rights of recoupment and set-off against the secured party. Subsection (c) contains an exception: If the secured party has control under section 9-104(a)(3) (i.e., if it has become the bank's customer), then any set-off exercised by the bank against a debt owed by the debtor (as opposed to a debt owed to the bank by the secured party) is ineffective. The bank may, however, exercise its recoupment rights effectively. This result is consistent with the priority rule in section 9-327(4), under which the security interest of a bank in a deposit account is subordinate to that of a secured party who has control under section 9-104(a)(3).

This section deals with rights of set-off and recoupment that a bank may have under other law. It does not create a right of set-off or recoupment, nor is it intended to override any limitations or restrictions that other law imposes on the exercise of those rights.

3. Preservation of Set-Off Right. Subsection (b) makes clear that a bank may hold both a right of set-off against, and an article 9 security interest in, the same deposit account. By holding a security interest in a deposit account, a bank does not impair any right of set-off it would otherwise enjoy. This subsection does not pertain to accounts evidenced by an instrument (e.g., certain certificates of deposit), which are excluded from the definition of "deposit accounts."

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Free Flow of Funds. This section is designed to prevent security interests in deposit accounts from impeding the free flow of funds through the payment system. Subject to two exceptions, it leaves the bank's rights and duties with respect to the deposit account and the funds on deposit unaffected by the creation or perfection of a security interest or by the bank's knowledge of the security interest. In addition, the section permits the bank to ignore the instructions of the secured party unless it had agreed to honor them or unless other law provides to the contrary. A secured party who wishes to deprive the debtor of access to funds on deposit or to appropriate those funds for itself needs to obtain the agreement of the bank, utilize the judicial process, or comply with procedures set forth in other law. Section 4-303(a), concerning the effect of notice on a bank's right and duty to pay items, is not to the contrary. That section addresses only whether an otherwise effective notice comes too late; it does not determine whether a timely notice is otherwise effective.

3. Operation of Rule. The general rule of this section is subject to section 9-340(c), under which a bank's right of set-off may not be exercised against a deposit account in the secured party's name if the right is based on a claim against the debtor. This result reflects current law in many jurisdictions and does not appear to have unduly disrupted banking practices or the payments system. The more important function of this section, which is not impaired by section 9-340, is the bank's right to follow the debtor's (customer's) instructions (e.g., by honoring checks, permitting withdrawals, etc.) until such time as the depository institution is served with judicial process or receives instructions with respect to the funds on deposit from a secured party who has control over the deposit account.

4. Liability of Bank. This article does not determine whether a bank that pays out funds from an encumbered deposit is liable to the holder of a security interest. Although the fact that a secured party has control over the deposit account and the manner by which control was achieved may be relevant to the imposition of liability, whatever rule applies generally when a bank pays out funds in which a third party has an interest would determine liability to a secured party. Often, this rule is found in a non-UCC adverse claim statute.

5. Certificates of Deposit. This section does not address the obligations of banks that issue instruments evidencing deposits (e.g., certain certificates of deposit).

OFFICIAL COMMENT

Comment. - 1. Source. New; derived from section 8-106(g).

2. Protection for Bank. This section protects banks from the need to enter into agreements against their will and from the need to respond to inquiries from persons other than their customers.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-311.

2. Scope of This Part. This part deals with several issues affecting third parties (i.e., parties other than the debtor and the secured party). These issues are not addressed in part 3, subpart 3, which deals with priorities. This part primarily addresses the rights and duties of account debtors and other persons obligated on collateral who are not, themselves, parties to a secured transaction.

3. Governing Law. There was some uncertainty under former Article 9 as to which jurisdiction's law (usually, which jurisdiction's version of Article 9) applied to the matters that this Part addresses. Part 3, Subpart 1, does not determine the law governing these matters because they do not relate to perfection, the effect of perfection or nonperfection, or priority. However, it might be inappropriate for a designation of applicable law by a debtor and secured party under Section 1-301 to control the law applicable to an independent transaction or relationship between the debtor and an account debtor.

Consider an example under section 9-408:

Example 1: State X has adopted this article; former article 9 is the law of State Y. A general intangible (e.g., a franchise agreement) between a debtor-franchisee, D, and an account debtor-franchisor, AD, is governed by the law of State Y. D grants to SP a security interest in its rights under the franchise agreement. The franchise agreement contains a term prohibiting D's assignment of its rights under the agreement. D and SP agree that their secured transaction is governed by the law of State X. Under State X's section 9-408, the restriction on D's assignment is ineffective to prevent the creation, attachment, or perfection of SP's security interest. State Y's former section 9-318(4), however, does not address restrictions on the creation of security interests in general intangibles other than general intangibles for money due or to become due. Accordingly, it does not address restrictions on the assignment to SP of D's rights under the franchise agreement. The non-article-9 law of State Y, which does address restrictions, provides that the prohibition on assignment is effective.

This article does not provide a specific answer to the question of which State's law applies to the restriction on assignment in the example. However, assuming that under non-UCC choice-of-law principles the effectiveness of the restriction would be governed by the law of State Y, which governs the franchise agreement, the fact that State X's article 9 governs the secured transaction between SP and D would not override the otherwise applicable law governing the agreement. Of course, to the extent that jurisdictions eventually adopt identical versions of this article and courts interpret it consistently, the inability to identify the applicable law in circumstances such as those in the example may be inconsequential.

4. Inalienability Under Other Law. Subsection (a) addresses the question whether property necessarily is transferable by virtue of its inclusion (i.e., its eligibility as collateral) within the scope of article 9. It gives a negative answer, subject to the identified exceptions. The substance of subsection (a) was implicit under former article 9.

5. Negative Pledge Covenant. Subsection (b) is an exception to the general rule in subsection (a). It makes clear that in secured transactions under this article the debtor has rights in collateral (whether legal title or equitable) which it can transfer and which its creditors can reach. It is best explained with an example:

Example 2: A debtor, D, grants to SP a security interest to secure a debt in excess of the value of the collateral. D agrees with SP that it will not create a subsequent security interest in the collateral and that any security interest purportedly granted in violation of the agreement will be void. Subsequently, in violation of its agreement with SP, D purports to grant a security interest in the same collateral to another secured party.

Subsection (b) validates D's creation of the subsequent (prohibited) security interest, which might even achieve priority over the earlier security interest. See comment 7. However, unlike some other provisions of this part, such as section 9-406, subsection (b) does not provide that the agreement restricting assignment itself is "ineffective. " Consequently, the debtor's breach may create a default.

6. Rights of Lien Creditors. Difficult problems may arise with respect to attachment, levy, and other judicial procedures under which a debtor's creditors may reach collateral subject to a security interest. For example, an obligation may be secured by collateral worth many times the amount of the obligation. If a lien creditor has caused all or a portion of the collateral to be seized under judicial process, it may be difficult to determine the amount of the debtor's "equity " in the collateral that has been seized. The section leaves resolution of this problem to the courts. The doctrine of marshaling may be appropriate.

7. Sale of Receivables. If a debtor sells an account, chattel paper, payment intangible, or promissory note outright, as against the buyer the debtor has no remaining rights to transfer. If, however, the buyer fails to perfect its interest, then solely insofar as the rights of certain third parties are concerned, the debtor is deemed to retain its rights and title. See section 9-318. The debtor has the power to convey these rights to a subsequent purchaser. If the subsequent purchaser (buyer or secured lender) perfects its interest, it will achieve priority over the earlier, unperfected purchaser. See section 9-322(a)(1).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-317.

2. Nonliability of Secured Party. This section, like former section 9-317, rejects theories on which a secured party might be held liable on a debtor's contracts or in tort merely because a security interest exists or because the debtor is entitled to dispose of or use collateral. This section expands former section 9-317 to cover agricultural liens.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-206.

2. Scope and Purpose. Subsection (b), like former section 9-206, generally validates an agreement between an account debtor and an assignor that the account debtor will not assert against an assignee claims and defenses that it may have against the assignor. These agreements are typical in installment sale agreements and leases. However, this section expands former section 9-206 to apply to all account debtors; it is not limited to account debtors that have bought or leased goods. This section applies only to the obligations of an "account debtor," as defined in section 9-102. Thus, it does not determine the circumstances under which and the extent to which a person who is obligated on a negotiable instrument is disabled from asserting claims and defenses. Rather, article 3 must be consulted. See, e.g., sections 3-305 and 3-306. Article 3 governs even when the negotiable instrument constitutes part of chattel paper. See section 9-102 (an obligor on a negotiable instrument constituting part of chattel paper is not an "account debtor").

3. Conditions of Validation; Relationship to Article 3. Subsection (b) validates an account debtor's agreement only if the assignee takes an assignment for value, in good faith, and without notice of conflicting claims to the property assigned or of certain claims or defenses of the account debtor. Like former section 9-206, this section is designed to put the assignee in a position that is no better and no worse than that of a holder in due course of a negotiable instrument under article 3. However, former section 9-206 left open certain issues, e.g., whether the section incorporated the special article 3 definition of "value" in section 3-303 or the generally applicable definition in section 1-201 (44). Subsection (a) addresses this question; it provides that "value" has the meaning specified in section 3-303(a). Similarly, subsection (c) provides that subsection (b) does not validate an agreement with respect to defenses that could be asserted against a holder in due course under section 3-305(b) (the so-called "real" defenses). In 1990, the definition of "holder in due course" (section 3-302) and the articulation of the rights of a holder in due course (sections 3-305 and 3-306) were revised substantially. This section tracks more closely the rules of sections 3-302, 3-305, and 3-306.

4. Relationship to Terms of Assigned Property. Former section 9-206(2), concerning warranties accompanying the sale of goods, has been deleted as unnecessary. This article does not regulate the terms of the account, chattel paper, or general intangible that is assigned, except insofar as the account, chattel paper, or general intangible itself creates a security interest (as often is the case with chattel paper). Thus, article 2, and not this article, determines whether a seller of goods makes or effectively disclaims warranties, even if the sale is secured. Similarly, other law, and not this article, determines the effectiveness of an account debtor's undertaking to pay notwithstanding, and not to assert, any defenses or claims against an assignor - e.g., a "hell-or-high-water" provision in the underlying agreement that is assigned. If other law gives effect to this undertaking, then, under principles of nemo dat , the undertaking would be enforceable by the assignee (secured party). If other law prevents the assignor from enforcing the undertaking, this section nevertheless might permit the assignee to do so. The right of the assignee to enforce would depend upon whether, under the particular facts, the account debtor's undertaking fairly could be construed as an agreement that falls within the scope of this section and whether the assignee meets the requirements of this section.

5. Relationship to Federal Trade Commission Rule. Subsection (d) is new. It applies to rights evidenced by a record that is required to contain, but does not contain, the notice set forth in Federal Trade Commission Rule 433, 16 C.F.R. part 433 (the "Holder-in-Due-Course Regulations"). Under this subsection, an assignee of such a record takes subject to the consumer account debtor's claims and defenses to the same extent as it would have if the writing had contained the required notice. Thus, subsection (d) effectively renders waiver-of-defense clauses ineffective in the transactions with consumers to which it applies.

6. Relationship to Other Law. Like former section 9-206(1), this section takes no position on the enforceability of waivers of claims and defenses by consumer account debtors, leaving that question to other law. However, the reference to "law other than this article" in subsection (e) encompasses administrative rules and regulations; the reference in former section 9-206(1) that it replaces ("statute or decision") arguably did not.

This section does not displace other law that gives effect to a nonconsumer account debtor's agreement not to assert defenses against an assignee, even if the agreement would not qualify under subsection (b). See subsection (f). It validates, but does not invalidate, agreements made by a nonconsumer account debtor. This section also does not displace other law to the extent that the other law permits an assignee, who takes an assignment with notice of a claim of a property or possessory right, a defense, or a claim in recoupment, to enforce an account debtor's agreement not to assert claims and defenses against the assignor (e.g., a "hell-or-high-water" agreement). See comment 4. It also does not displace an assignee's right to assert that an account debtor is estopped from asserting a claim or defense. Nor does this section displace other law with respect to waivers of potential future claims and defenses that are the subject of an agreement between the account debtor and the assignee. Finally, it does not displace section 1-107, concerning waiver of a breach that allegedly already has occurred.

CASE NOTES

Negotiable instrument could not also be account or general intangible. - Where a note was a negotiable instrument under former § 8.3-104 and, therefore, an instrument under former § 8.9-105 (1) (i), it could not also be an account or general intangible subject to the notice requirements of subsection (3) of former § 8.9-318. Lambert v. Barker, 232 Va. 21 , 348 S.E.2d 214 (1986) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-318(1).

2. Purpose; Rights of Assignee in General. Subsection (a), like former section 9-318(1), provides that an assignee generally takes an assignment subject to defenses and claims of an account debtor. Under subsection (a)(1), if the account debtor's defenses on an assigned claim arise from the transaction that gave rise to the contract with the assignor, it makes no difference whether the defense or claim accrues before or after the account debtor is notified of the assignment. Under subsection (a)(2), the assignee takes subject to other defenses or claims only if they accrue before the account debtor has been notified of the assignment. Of course, an account debtor may waive its right to assert defenses or claims against an assignee under section 9-403 or other applicable law. Subsection (a) tracks section 3-305(a)(3) more closely than its predecessor.

3. Limitation on Affirmative Claims. Subsection (b) is new. It limits the claim that the account debtor may assert against an assignee. Borrowing from section 3-305(a)(3) and cases construing former section 9-318, subsection (b) generally does not afford the account debtor the right to an affirmative recovery from an assignee.

4. Consumer Account Debtors; Relationship to Federal Trade Commission Rule. Subsections (c) and (d) also are new. Subsection (c) makes clear that the rules of this section are subject to other law establishing special rules for consumer account debtors. An "account debtor who is an individual" as used in subsection (c) includes individuals who are jointly or jointly and severally obligated. Subsection (d) applies to rights evidenced by a record that is required to contain, but does not contain, the notice set forth in Federal Trade Commission Rule 433, 16 C.F.R. part 433 (the "Holder-in-Due-Course Regulations"). Under subsection (d), a consumer account debtor has the same right to an affirmative recovery from an assignee of such a record as the consumer would have had against the assignee had the record contained the required notice.

5. Scope; Application to "Account Debtor." This section deals only with the rights and duties of "account debtors" - and for the most part only with account debtors on accounts, chattel paper, and payment intangibles. Subsection (e) provides that the obligation of an insurer with respect to a health care insurance receivable is governed by other law. References in this section to an "account debtor" include account debtors on collateral that is proceeds. Neither this section nor any other provision of this article, including sections 9-408 and 9-409, provides analogous regulation of the rights and duties of other obligors on collateral, such as the maker of a negotiable instrument (governed by article 3), the issuer of or nominated person under a letter of credit (governed by article 5), or the issuer of a security (governed by article 8). Article 9 leaves those rights and duties untouched; however, section 9-409 deals with the special case of letters of credit. When chattel paper is composed in part of a negotiable instrument, the obligor on the instrument is not an "account debtor," and article 3 governs the rights of the assignee of the chattel paper with respect to the issues that this section addresses. See, e.g., section 3-601 (dealing with discharge of an obligation to pay a negotiable instrument).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-318(2).

2. Modification of Assigned Contract. The ability of account debtors and assignors to modify assigned contracts can be important, especially in the case of government contracts and complex contractual arrangements (e.g., construction contracts) with respect to which modifications are customary. Subsections (a) and (b) provide that good-faith modifications of assigned contracts are binding against an assignee to the extent that (i) the right to payment has not been fully earned or (ii) the right to payment has been earned and notification of the assignment has not been given to the account debtor. Former section 9-318(2) did not validate modifications of fully-performed contracts under any circumstances, whether or not notification of the assignment had been given to the account debtor. Subsection (a) protects the interests of assignees by (i) limiting the effectiveness of modifications to those made in good faith, (ii) affording the assignee with corresponding rights under the contract as modified, and (iii) recognizing that the modification may be a breach of the assignor's agreement with the assignee.

3. Consumer Account Debtors. Subsection (c) is new. It makes clear that the rules of this section are subject to other law establishing special rules for consumer account debtors.

4. Account Debtors on Health-Care-Insurance Receivables. Subsection (d) also is new. It provides that this section does not apply to an assignment of a health-care-insurance receivable. The obligation of an insurer with respect to a health-care-insurance receivable is governed by other law.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-318(3), (4).

2. Account Debtor's Right to Pay Assignor Until Notification. Subsection (a) provides the general rule concerning an account debtor's right to pay the assignor until the account debtor receives appropriate notification. The revision makes clear that once the account debtor receives the notification, the account debtor cannot discharge its obligation by paying the assignor. It also makes explicit that payment to the assignor before notification, or payment to the assignee after notification, discharges the obligation. No change in meaning from former section 9-318 is intended. Nothing in this section conditions the effectiveness of a notification on the identity of the person who gives it. An account debtor that doubts whether the right to payment has been assigned may avail itself of the procedures in subsection (c). See comment 4.

An effective notification under subsection (a) must be authenticated. This requirement normally could be satisfied by sending notification on the notifying person's letterhead or on a form on which the notifying person's name appears. In each case the printed name would be a symbol adopted by the notifying person for the purpose of identifying the person and adopting the notification. See section 9-102 (defining "authenticate").

Subsection (a) applies only to account debtors on accounts, chattel paper, and payment intangibles. (Section 9-102 defines the term "account debtor" more broadly, to include those obligated on all general intangibles.) Although subsection (a) is more precise than its predecessor, it probably does not change the rule that applied under former article 9. Former section 9-318(3) referred to the account debtor's obligation to "pay," indicating that the subsection was limited to account debtors on accounts, chattel paper, and other payment obligations.

3. Limitations on Effectiveness of Notification. Subsection (b) contains some special rules concerning the effectiveness of a notification under subsection (a).

Subsection (b)(1) tracks former section 9-318(3) by making ineffective a notification that does not reasonably identify the rights assigned. A reasonable identification need not identify the right to payment with specificity, but what is reasonable also is not left to the arbitrary decision of the account debtor. If an account debtor has doubt as to the adequacy of a notification, it may not be safe in disregarding the notification unless it notifies the assignee with reasonable promptness as to the respects in which the account debtor considers the notification defective.

Subsection (b)(2), which is new, applies only to sales of payment intangibles. It makes a notification ineffective to the extent that other law gives effect to an agreement between an account debtor and a seller of a payment intangible that limits the account debtor's duty to pay a person other than the seller. Payment intangibles are substantially less fungible than accounts and chattel paper. In some (e.g., commercial bank loans), account debtors customarily and legitimately expect that they will not be required to pay any person other than the financial institution that has advanced funds.

It has become common in financing transactions to assign interests in a single obligation to more than one assignee. Requiring an account debtor that owes a single obligation to make multiple payments to multiple assignees would be unnecessarily burdensome. Thus, under subsection (b)(3), an account debtor that is notified to pay an assignee less than the full amount of any installment or other periodic payment has the option to treat the notification as ineffective, ignore the notice, and discharge the assigned obligation by paying the assignor. Some account debtors may not realize that the law affords them the right to ignore certain notices of assignment with impunity. By making the notification ineffective at the account debtor's option, subsection (b)(3) permits an account debtor to pay the assignee in accordance with the notice and thereby to satisfy its obligation pro tanto. Under subsection (g), the rights and duties created by subsection (b)(3) cannot be waived or varied.

4. Proof of Assignment. Subsection (c) links payment with discharge, as in subsection (a). It follows former section 9-318(3) in referring to the right of the account debtor to pay the assignor if the requested proof of assignment is not seasonably forthcoming. Even if the proof is not forthcoming, the notification of assignment would remain effective, so that, in the absence of reasonable proof of the assignment, the account debtor could discharge the obligation by paying either the assignee or the assignor. Of course, if the assignee did not in fact receive an assignment, the account debtor cannot discharge its obligation by paying a putative assignee who is a stranger. The observations in comment 3 concerning the reasonableness of an identification of a right to payment also apply here. An account debtor that questions the adequacy of proof submitted by an assignor would be well advised to promptly inform the assignor of the defects.

An account debtor may face another problem if its obligation becomes due while the account debtor is awaiting reasonable proof of the assignment that it has requested from the assignee. This section does not excuse the account debtor from timely compliance with its obligations. Consequently, an account debtor that has received a notification of assignment and who has requested reasonable proof of the assignment may discharge its obligation by paying the assignor at the time (or even earlier if reasonably necessary to avoid risk of default) when a payment is due, even if the account debtor has not yet received a response to its request for proof. On the other hand, after requesting reasonable proof of the assignment, an account debtor may not discharge its obligation by paying the assignor substantially in advance of the time that the payment is due unless the assignee has failed to provide the proof seasonably.

5. Contractual Restrictions on Assignment. Former section 9-318(4) rendered ineffective an agreement between an account debtor and an assignor which prohibited assignment of an account (whether outright or to secure an obligation) or prohibited a security assignment of a general intangible for the payment of money due or to become due. Subsection (d) essentially follows former section 9-318(4), but expands the rule of free assignability to chattel paper (subject to sections 2A-303 and 9-407) and promissory notes and explicitly overrides both restrictions and prohibitions of assignment. The policies underlying the ineffectiveness of contractual restrictions under this section build on common-law developments that essentially have eliminated legal restrictions on assignments of rights to payment as security and other assignments of rights to payment such as accounts and chattel paper. Any that might linger for accounts and chattel paper are addressed by new subsection (f). See comment 6.

Former section 9-318(4) did not apply to a sale of a payment intangible (as described in the former provision, "a general intangible for money due or to become due") but did apply to an assignment of a payment intangible for security. Subsection (e) continues this approach and also makes subsection (d) inapplicable to sales of promissory notes. Section 9-408 addresses anti-assignment clauses with respect to sales of payment intangibles and promissory notes.

Like former section 9-318(4), subsection (d) provides that anti-assignment clauses are "ineffective." The quoted term means that the clause is of no effect whatsoever; the clause does not prevent the assignment from taking effect between the parties and the prohibited assignment does not constitute a default under the agreement between the account debtor and assignor. However, subsection (d) does not override terms that do not directly prohibit, restrict, or require consent to an assignment but which might, nonetheless, present a practical impairment of the assignment. Properly read, however, subsection (d) reaches only covenants that prohibit, restrict, or require consents to assignments; it does not override all terms that might "impair" an assignment in fact.

Example: Buyer enters into an agreement with Seller to buy equipment that Seller is to manufacture according to Buyer's specifications. Buyer agrees to make a series of prepayments during the construction process. In return, Seller agrees to set aside the prepaid funds in a special account and to use the funds solely for the manufacture of the designated equipment. Seller also agrees that it will not assign any of its rights under the sale agreement with Buyer. Nevertheless, Seller grants to Secured Party a security interest in its accounts. Seller's anti-assignment agreement is ineffective under subsection (d); its agreement concerning the use of prepaid funds, which is not a restriction or prohibition on assignment, is not. However, if Secured Party notifies Buyer to make all future payments directly to Secured Party, Buyer will be obliged to do so under subsection (a) if it wishes the payments to discharge its obligation. Unless Secured Party releases the funds to Seller so that Seller can comply with its use-of-funds covenant, Seller will be in breach of that covenant.

In the example, there appears to be a plausible business purpose for the use-of-funds covenant. However, a court may conclude that a covenant with no business purpose other than imposing an impediment to an assignment actually is a direct restriction that is rendered ineffective by subsection (d).

6. Legal Restrictions on Assignment. Former section 9-318(4), like subsection (d) of this section, addressed only contractual restrictions on assignment. The former section was grounded on the reality that legal, as opposed to contractual, restrictions on assignments of rights to payment had largely disappeared. New subsection (f) codifies this principle of free assignability for accounts and chattel paper. For the most part the discussion of contractual restrictions in comment 5 applies as well to legal restrictions rendered ineffective under subsection (f).

7. Multiple Assignments. This section, like former section 9-318, is not a complete codification of the law of assignments of rights to payment. In particular, it is silent concerning many of the ramifications for an account debtor in cases of multiple assignments of the same right. For example, an assignor might assign the same receivable to multiple assignees (which assignments could be either inadvertent or wrongful). Or, the assignor could assign the receivable to assignee-1, which then might reassign it to assignee-2, and so forth. The rights and duties of an account debtor in the face of multiple assignments and in other circumstances not resolved in the statutory text are left to the common-law rules. See, e.g., Restatement (2d), Contracts sections 338(3) and 339. The failure of former article 9 to codify these rules does not appear to have caused problems.

8. Consumer Account Debtors. Subsection (h) is new. It makes clear that the rules of this section are subject to other law establishing special rules for consumer account debtors.

9. Account Debtors on Health-Care-Insurance Receivables. Subsection (i) also is new. The obligation of an insurer with respect to a health-care-insurance receivable is governed by other law. Section 9-408 addresses contractual and legal restrictions on the assignment of a health-care-insurance receivable.

OFFICIAL COMMENT

Comment. - 1. Source. Section 2A-303.

2. Restrictions on Assignment Generally Ineffective. Under subsection (a), as under former section 2A-303(3), a term in a lease agreement which prohibits or restricts the creation of a security interest generally is ineffective. This reflects the general policy of section 9-406(d) and former section 9-318(4). This section has been conformed in several respects to analogous provisions in sections 9-406, 9-408, and 9-409, including the substitution of "ineffective" for "not enforceable" and the substitution of "assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest" for "creation or enforcement of a security interest."

3. Exceptions for Certain Transfers and Delegations. Subsection (b) provides exceptions to the general ineffectiveness of restrictions under subsection (a). A term that otherwise is ineffective under subsection (a)(2) is effective to the extent that a lessee transfers its right to possession and use of goods or if either party delegates material performance of the lease contract in violation of the term. However, under subsection (c), as under former section 2A-303(3), a lessor's creation of a security interest in its interest in a lease contract or its residual interest in the leased goods is not a material impairment under section 2A-303(4) (former section 2A-303(5)), absent an actual delegation of the lessor's material performance. The terms of the lease contract determine whether the lessor, in fact, has any remaining obligations to perform. If it does, it is then necessary to determine whether there has been an actual delegation of "material performance." See section 2A-303, comments 3 and 4.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Free Assignability. This section makes ineffective any attempt to restrict the assignment of a general intangible, health-care-insurance receivable, or promissory note, whether the restriction appears in the terms of a promissory note or the agreement between an account debtor and a debtor (subsection (a)) or in a rule of law, including a statute or governmental rule or regulation (subsection (c)). This result allows the creation, attachment, and perfection of a security interest in a general intangible, such as an agreement for the nonexclusive license of software, as well as sales of certain receivables, such as a health-care-insurance receivable (which is an "account"), payment intangible, or promissory note, without giving rise to a default or breach by the assignor or from triggering a remedy of the account debtor or person obligated on a promissory note. This enhances the ability of certain debtors to obtain credit. On the other hand, subsection (d) protects the other party - the "account debtor" on a general intangible or the person obligated on a promissory note - from adverse effects arising from the security interest. It leaves the account debtor's or obligated person's rights and obligations unaffected in all material respects if a restriction rendered ineffective by subsection (a) or (c) would be effective under law other than article 9.

Example 1: A term of an agreement for the nonexclusive license of computer software prohibits the licensee from assigning any of its rights as licensee with respect to the software. The agreement also provides that an attempt to assign rights in violation of the restriction is a default entitling the licensor to terminate the license agreement. The licensee, as debtor, grants to a secured party a security interest in its rights under the license and in the computers in which it is installed. Under this section, the term prohibiting assignment and providing for a default upon an attempted assignment is ineffective to prevent the creation, attachment, or perfection of the security interest or entitle the licensor to terminate the license agreement. However, under subsection (d), the secured party (absent the licensor's agreement) is not entitled to enforce the license or to use, assign, or otherwise enjoy the benefits of the licensed software, and the licensor need not recognize (or pay any attention to) the secured party. Even if the secured party takes possession of the computers on the debtor's default, the debtor would remain free to remove the software from the computer, load it on another computer, and continue to use it, if the license so permits. If the debtor does not remove the software, other law may require the secured party to remove it before disposing of the computer. Disposition of the software with the computer could violate an effective prohibition on enforcement of the security interest. See subsection (d).

3. Nature of Debtor's Interest. Neither this section nor any other provision of this article determines whether a debtor has a property interest. The definition of the term "security interest" provides that it is an "interest in personal property." See Section 1-201(b)(35). Ordinarily, a debtor can create a security interest in collateral only if it has "rights in the collateral." See Section 9-203(b). Other law determines whether a debtor has a property interest ("rights in the collateral") and the nature of that interest. For example, the nonexclusive license addressed in Example 1 may not create any property interest whatsoever in the intellectual property (e.g., copyright) that underlies the license and that effectively enables the licensor to grant the license. The debtor's property interest may be confined solely to its interest in the promises made by the licensor in the license agreement (e.g., a promise not to sue the debtor for its use of the software).

4. Scope: Sales of Payment Intangibles and Other General Intangibles; Assignments Unaffected by this Section. Subsections (a) and (c) render ineffective restrictions on assignments only "to the extent" that the assignments restrict the "creation, attachment, or perfection of a security interest," including sales of payment intangibles and promissory notes. This section does not render ineffective a restriction on an assignment that does not create a security interest. For example, if the debtor in comment 2, Example 1, purported to assign the license to another entity that would use the computer software itself, other law would govern the effectiveness of the anti-assignment provisions.

Subsection (a) applies to a security interest in payment intangibles only if the security interest arises out of sale of the payment intangibles. Contractual restrictions directed to security interests in payment intangibles which secure an obligation are subject to section 9-406(d). Subsection (a) also deals with sales of promissory notes which also create security interests. See section 9-109(a). Subsection (c) deals with all security interests in payment intangibles or promissory notes, whether or not arising out of a sale.

Subsection (a) does not render ineffective any term, and subsection (c) does not render ineffective any law, statute, or regulation, that restricts outright sales of general intangibles other than payment intangibles. They deal only with restrictions on security interests. The only sales of general intangibles that create security interests are sales of payment intangibles.

5. Terminology: "Account Debtor"; "Person Obligated on a Promissory Note." This section uses the term "account debtor" as it is defined in section 9-102. The term refers to the party, other than the debtor, to a general intangible, including a permit, license, franchise, or the like, and the person obligated on a health-care-insurance receivable, which is a type of account. The definition of "account debtor" does not limit the term to persons who are obligated to pay under a general intangible. Rather, the term includes all persons who are obligated on a general intangible, including those who are obligated to render performance in exchange for payment. In some cases, e.g., the creation of a security interest in a franchisee's rights under a franchise agreement, the principal payment obligation may be owed by the debtor (franchisee) to the account debtor (franchisor). This section also refers to a "person obligated on a promissory note," inasmuch as those persons do not fall within the definition of "account debtor."

Example 2: A licensor and licensee enter into an agreement for the nonexclusive license of computer software. The licensee's interest in the license agreement is a general intangible. If the licensee grants to a secured party a security interest in its rights under the license agreement, the licensee is the debtor and the licensor is the account debtor. On the other hand, if the licensor grants to a secured party a security interest in its right to payment (an account) under the license agreement, the licensor is the debtor and the licensee is the account debtor. (This section applies to the security interest in the general intangible but not to the security interest in the account, which is not a health-care-insurance receivable.)

6. Effects on Account Debtors and Persons Obligated on Promissory Notes. Subsections (a) and (c) affect two classes of persons. These subsections affect account debtors on general intangibles and health-care-insurance receivables and persons obligated on promissory notes. Subsection (c) also affects governmental entities that enact or determine rules of law. However, subsection (d) ensures that these affected persons are not affected adversely. That provision removes any burdens or adverse effects on these persons for which any rational basis could exist to restrict the effectiveness of an assignment or to exercise any remedies. For this reason, the effects of subsections (a) and (c) are immaterial insofar as those persons are concerned.

Subsection (a) does not override terms that do not directly prohibit, restrict, or require consent to an assignment but which might, nonetheless, present a practical impairment of the assignment. Properly read, however, this section, like section 9-406(d), reaches only covenants that prohibit, restrict, or require consents to assignments; it does not override all terms that might "impair" an assignment in fact.

Example 3: A licensor and licensee enter into an agreement for the nonexclusive license of valuable business software. The license agreement includes terms (i) prohibiting the licensee from assigning its rights under the license, (ii) prohibiting the licensee from disclosing to anyone certain information relating to the software and the licensor, and (iii) deeming prohibited assignments and prohibited disclosures to be defaults. The licensee wishes to obtain financing and, in exchange, is willing to grant a security interest in its rights under the license agreement. The secured party, reasonably, refuses to extend credit unless the licensee discloses the information that it is prohibited from disclosing under the license agreement. The secured party cannot determine the value of the proposed collateral in the absence of this information. Under this section, the terms of the license prohibiting the assignment (grant of the security interest) and making the assignment a default are ineffective. However, the nondisclosure covenant is not a term that prohibits the assignment or creation of a security interest in the license. Consequently, the nondisclosure term is enforceable even though the practical effect is to restrict the licensee's ability to use its rights under the license agreement as collateral.

The nondisclosure term also would be effective in the factual setting of comment 2, Example 1. If the secured party's possession of the computers loaded with software would put it in a position to discover confidential information that the debtor was prohibited from disclosing, the licensor should be entitled to enforce its rights against the secured party. Moreover, the licensor could have required the debtor to obtain the secured party's agreement that (i) it would immediately return all copies of software loaded on the computers and that (ii) it would not examine or otherwise acquire any information contained in the software. This section does not prevent an account debtor from protecting by agreement its independent interests that are unrelated to the "creation, attachment, or perfection" of a security interest. In Example 1, moreover, the secured party is not in possession of copies of software by virtue of its security interest or in connection with enforcing its security interest in the debtor's license of the software. Its possession is incidental to its possession of the computers, in which it has a security interest. Enforcing against the secured party a restriction relating to the software in no way interferes with its security interest in the computers.

7. Effect in Assignor's Bankruptcy. This section could have a substantial effect if the assignor enters bankruptcy. Roughly speaking, Bankruptcy Code section 552 invalidates security interests in property acquired after a bankruptcy petition is filed, except to the extent that the postpetition property constitutes proceeds of prepetition collateral.

Example 4: A debtor is the owner of a cable television franchise that, under applicable law, cannot be assigned without the consent of the municipal franchisor. A lender wishes to extend credit to the debtor, provided that the credit is secured by the debtor's "going business" value. To secure the loan, the debtor grants a security interest in all its existing and after-acquired property. The franchise represents the principal value of the business. The municipality refuses to consent to any assignment for collateral purposes. If other law were given effect, the security interest in the franchise would not attach; and if the debtor were to enter bankruptcy and sell the business, the secured party would receive but a fraction of the business's value. Under this section, however, the security interest would attach to the franchise. As a result, the security interest would attach to the proceeds of any sale of the franchise while a bankruptcy is pending. However, this section would protect the interests of the municipality by preventing the secured party from enforcing its security interest to the detriment of the municipality.

8. Effect Outside of Bankruptcy. The principal effects of this section will take place outside of bankruptcy. Compared to the relatively few debtors that enter bankruptcy, there are many more that do not. By making available previously unavailable property as collateral, this section should enable debtors to obtain additional credit. For purposes of determining whether to extend credit, under some circumstances a secured party may ascribe value to the collateral to which its security interest has attached, even if this section precludes the secured party from enforcing the security interest without the agreement of the account debtor or person obligated on the promissory note. This may be the case where the secured party sees a likelihood of obtaining that agreement in the future. This may also be the case where the secured party anticipates that the collateral will give rise to a type of proceeds as to which this section would not apply.

Example 5: Under the facts of Example 4, the debtor does not enter bankruptcy. Perhaps in exchange for a fee, the municipality agrees that the debtor may transfer the franchise to a buyer. As consideration for the transfer, the debtor receives from the buyer its check for part of the purchase price and its promissory note for the balance. The security interest attaches to the check and promissory note as proceeds. See section 9-315(a)(1)(B). This section does not apply to the security interest in the check, which is not a promissory note, health-care-insurance receivable, or general intangible. Nor does it apply to the security interest in the promissory note, inasmuch as it was not sold to the secured party.

9. Contrary Federal Law. This section does not override federal law to the contrary. However, it does reflect an important policy judgment that should provide a template for future federal law reforms.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Purpose and Relevance. This section, patterned on section 9-408, limits the effectiveness of attempts to restrict the creation, attachment, or perfection of a security interest in letter-of-credit rights, whether the restriction appears in the letter of credit or a rule of law, custom, or practice applicable to the letter of credit. It protects the creation, attachment, and perfection of a security interest while preventing these events from giving rise to a default or breach by the assignor or from triggering a remedy or defense of the issuer or other person obligated on a letter of credit. Letter-of-credit rights are a type of supporting obligation. See section 9-102. Under sections 9-203 and 9-308, a security interest in a supporting obligation attaches and is perfected automatically if the security interest in the supported obligation attaches and is perfected. See section 9-107, comment 5. The automatic attachment and perfection under article 9 would be anomalous or misleading if, under other law (e.g., article 5), a restriction on transfer or assignment were effective to block attachment and perfection.

3. Relationship to Letter-of-Credit Law. Although restrictions on an assignment of a letter of credit are ineffective to prevent creation, attachment, and perfection of a security interest, subsection (b) protects the issuer and other parties from any adverse effects of the security interest by preserving letter-of-credit law and practice that limits the right of a beneficiary to transfer its right to draw or otherwise demand performance (section 5-112) and limits the obligation of an issuer or nominated person to recognize a beneficiary's assignment of letter-of-credit proceeds (section 5-114). Thus, this section's treatment of letter-of-credit rights differs from this article's treatment of instruments and investment property. Moreover, under section 9-109(c)(4), this article does not apply to the extent that the rights of a transferee beneficiary or nominated person are independent and superior under section 5-114, thereby preserving the "independence principle" of letter-of-credit law.

CASE NOTES

The dual filing requirement under this section is mandatory. In re Hurt Enters., Inc., 321 F. Supp. 1307 (W.D. Va. 1971).

The filing requirements of the Uniform Commercial Code are precise and mandatory. In re Mauck, 378 F. Supp. 904 (W.D. Va. 1974).

The Uniform Commercial Code filing requirements are mandatory. Creditway of Am. v. Phillips, 55 Bankr. 663 (Bankr. W.D. Va. 1985).

The requirements of former § 8.9-401 (see now this section) are strictly applied as to third parties without notice and a trustee in bankruptcy is such a third party and enjoys priority over unperfected security interests. Viking Credit Corp. v. JJ's Home Style Laundry, Inc., 123 Bankr. 22 (Bankr. E.D. Va. 1990).

To be effectively filed, a financing statement must be filed in the proper place, specified in this section. Virginia Nat'l Bank v. Yale Mining Corp., 39 Bankr. 201 (Bankr. W.D. Va. 1984).

Since creditor complied with the filing requirements of §§ 8.9A-310 (a) and 8.9A-501(a)(2) to perfect its security interest in the tenants' crops, its security interest took precedent pursuant to § 8.9A-334 (i) over the landlord's un-perfected interest in the crops; therefore, the court granted the creditors' summary judgment motion on the issue of creditor priority. Dean v. Hall,, 2003 U.S. Dist. LEXIS 12720 (E.D. Va. Feb. 25, 2003).

The filing of a financing statement in an improper place, or not in all the places required, is ineffective to perfect a security interest. In re Hurt Enters., Inc., 321 F. Supp. 1307 (W.D. Va. 1971); Creditway of Am. v. Phillips, 55 Bankr. 663 (Bankr. W.D. Va. 1985).

Knowledge required by subsection (2) of former § 8.9-401. - Knowledge of the contents of the security agreement was not the test established by subsection (2) of former § 8.9-401. Subsection (2) of former § 8.9-401 required knowledge of the contents of the improperly filed financing statement. In re County Green Ltd. Partnership, 438 F. Supp. 693 (W.D. Va. 1977).

A determination by a bankruptcy court which equated knowledge of a security agreement and its contents with knowledge of the contents of the financing statement was improper. In re County Green Ltd. Partnership, 438 F. Supp. 693 (W.D. Va. 1977).

Establishment of place of business. - The creditors' knowledge that a debtor merely has assets located at a particular site is insufficient to establish a place of business. Phillips v. Ball & Hunt Enters., Inc., 933 F. Supp. 1290 (W.D. Va. 1996).

Creditor who filed security agreement in city, while bankrupt's "place of business" was in county, despite slight overlap into city, failed to perfect. In re Mauck, 378 F. Supp. 904 (W.D. Va. 1974).

Filing in county where business in city. - In a bankruptcy proceeding where the plaintiff filed financing statements in the clerk's office of the State Corporation Commission and in the circuit court of a county but failed to file in the circuit court of the city in which the defendant maintained his business, this failure to properly file the statements rendered plaintiff's efforts to perfect its security interest ineffective. Maremont Mktg., Inc. v. Marshall (In re G.G. Moss Co.), 9 Bankr. 47 (Bankr. E.D. Va. 1981), aff'd, 676 F.2d 692 (4th Cir. 1982).

Lessor who improperly filed in county rather than city which was lessee's sole place of business could not perfect his security interest despite having properly filed financing statements with the State Corporation Commission. Litton Indus. Credit Corp. v. Dunn Bros., 16 Bankr. 42 (Bankr. W.D. Va. 1981).

Failure to file with S.C.C. - Where the creditor filed a financing statement in the office of the clerk of the court in the county where the business was located, but neglected to file with the Corporation Commission until after the bankruptcy petition was filed, this failure strictly to comply with the statute left the security interest in the equipment unperfected as against third parties. As against the debtors, however, the interest was perfected. Dominion Bank v. Nuckolls, 780 F.2d 408 (4th Cir. 1985).

Interest of creditor, which properly filed financing statement in county, but neglected to file with SCC until after filing of debtors' bankruptcy petition, in the collateral, being unperfected vis-a-vis the bankruptcy trustee until post-petition, was subordinate to the interest of the bankruptcy trustee. Nuckolls v. Dominion Bank, 63 Bankr. 254 (Bankr. W.D. Va. 1986), aff'd, 71 Bankr. 593 (W.D. Va. 1987).

Effect on bankruptcy proceedings of failure to file conditional sales contract in proper office under former § 55-88. - See In re Markham, 254 F. Supp. 948 (W.D. Va. 1966).

Although creditor argued that the debtors misled it by maintaining in their various paperwork that their mailing address was in a different county other than where the business was located and that it was this intentional conduct that caused the statement to be improperly filed, whether or not the debtors intentionally misled the creditor was irrelevant since the requirements of this section are strictly applied as to third parties without notice and the debtors in possession, as such third parties, act in a fiduciary capacity for the benefit of creditors and therefore the creditor's claim was not a secured claim. Viking Credit Corp. v. JJ's Home Style Laundry, Inc., 123 Bankr. 22 (Bankr. E.D. Va. 1990).

Relief from stay in bankruptcy proceedings. - In a bankruptcy proceeding, the key factor in determining whether to grant the motion of the assignee of the secured party for relief from the stay to repossess collateral is the classification of the collateral. If the goods are classified as consumer goods, then the assignee would not need to file a financing statement to have a perfected security interest in the collateral. However, if the goods are classified as equipment, then, pursuant to subsection (1) (c) of former § 8.9-401, it would be necessary for the assignee to have a dual filing to perfect its security interest. Creditway of Am. v. Phillips, 55 Bankr. 663 (Bankr. W.D. Va. 1985).

Supplies had not become fixtures. - Electrical supplies to be installed in a school under construction had not become fixtures, as defined by former § 8.9-313 (1) (a), at the time the electrical contractor's creditor bank sought to take possession thereof, and thus the creditor need not have filed its financing statement as a fixture filing under subsection (1) (b) of former § 8.9-401. Where the bank made a proper filing under subsection (1) (c) of former § 8.9-401, the bank thus acquired a perfected security interest in the electrical supplies. Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844 , 263 S.E.2d 408 (1980).

Interest in intangible personal property. - Subsection (1) (c) of former § 8.9-401 provides for perfection of an interest in intangible personal property. First Nat'l Exch. Bank v. Kelly, 21 Bankr. 495 (Bankr. W.D. Va. 1982).

Passing of title to assets found. - While this section governs when title to goods passes to a buyer, this section provides that its rules only apply if there has not been an agreement to the contrary. The agreement in question expressly provided for the time when the assets would be conveyed. The language of the agreement clearly indicated that the assets would be conveyed at a future date. A condition precedent to the passing of title of the assets was that the bank be repaid the loan. Such loan was fully repaid and therefore, the title to the assets passed. Phillips v. Ball & Hunt Enters., Inc., 933 F. Supp. 1290 (W.D. Va. 1996).

Valid security interest in mining equipment found. - In the present case, the collateral involved was mining equipment and the debtor had no place of business in Virginia, and the debtor was not a resident of Virginia. This situation came within the coverage of the catch-all phrase, "in all other cases" of subsection (1)(c) of former § 8.9-401. Accordingly, the proper place to file was with the State Corporation Commission. Thus, the sellers took all necessary steps to perfect their security interest under Virginia law, and therefore, possessed a validly perfected security interest in the mining equipment. Phillips v. Ball & Hunt Enters., Inc., 933 F. Supp. 1290 (W.D. Va. 1996).

Applied in Ainslie v. Inman, 265 Va. 347 , 577 S.E.2d 246, 2003 Va. LEXIS 25 (2003).

OFFICIAL COMMENT

Comment. - 1. Source. Derived from former section 9-401.

2. Where to File. Subsection (a) indicates where in a given state a financing statement is to be filed. Former article 9 afforded each state three alternative approaches, depending on the extent to which the state desires central filing (usually with the Secretary of State), local filing (usually with a county office), or both. As comment 1 to former section 9-401 observed, "The principal advantage of state-wide filing is ease of access to the credit information which the files exist to provide. Consider for example the national distributor who wishes to have current information about the credit standing of the thousands of persons he sells to on credit. The more completely the files are centralized on a state-wide basis, the easier and cheaper it becomes to procure credit information; the more the files are scattered in local filing units, the more burdensome and costly." Local filing increases the net costs of secured transactions also by increasing uncertainty and the number of required filings. Any benefit that local filing may have had in the 1950's is now insubstantial. Accordingly, this article dictates central filing for most situations, while retaining local filing for real-estate-related collateral and special filing provisions for transmitting utilities.

3. Minerals and Timber. Under subsection (a)(1), a filing in the office where a record of a mortgage on the related real property would be filed will perfect a security interest in as-extracted collateral. Inasmuch as the security interest does not attach until extraction, the filing continues to be effective after extraction. A different result occurs with respect to timber to be cut, however. Unlike as-extracted collateral, standing timber may be goods before it is cut. See section 9-102 (defining "goods"). Once cut, however, it is no longer timber to be cut, and the filing in the real-property-mortgage office ceases to be effective. The timber then becomes ordinary goods, and filing in the office specified in subsection (a)(2) is necessary for perfection. Note also that after the timber is cut the law of the debtor's location, not the location of the timber, governs perfection under section 9-301.

4. Fixtures. There are two ways in which a secured party may file a financing statement to perfect a security interest in goods that are or are to become fixtures. It may file in the article 9 records, as with most other goods. See subsection (a)(2). Or it may file the financing statement as a "fixture filing," defined in section 9-102, in the office in which a record of a mortgage on the related real property would be filed. See subsection(a)(1)(B).

5. Transmitting Utilities. The usual filing rules do not apply well for a transmitting utility (defined in section 9-102). Many pre-UCC statutes provided special filing rules for railroads and in some cases for other public utilities, to avoid the requirements for filing with legal descriptions in every county in which such debtors had property. Former section 9-401(5) recreated and broadened these provisions, and subsection (b) follows this approach. The nature of the debtor will inform persons searching the record as to where to make a search.

A given State's subsection (b) applies only if the local law of that State governs perfection. As to most collateral, perfection by filing is governed by the law of the jurisdiction in which the debtor is located. See Section 9-301(1). However, the law of the jurisdiction in which goods that are or become fixtures are located governs perfection by filing a fixture filing. See Section 9-301(3)(A). As a consequence, filing in the filing office of more than one State may be necessary to perfect a security interest in fixtures collateral of a transmitting utility by filing a fixture filing. See Section 9-301, Comment 5.b.

CASE NOTES

Purpose. - Subsection (8) of former § 8.9-402 was intended to demonstrate clearly that the purpose of this section is to create a system of notice filing which contemplates further inquiry by a party in order to determine whether a particular asset is covered by a security agreement. Hixon v. Credit Alliance Corp., 235 Va. 466 , 369 S.E.2d 169 (1988).

Financing statement serves purpose of giving notice to third parties that a security interest is claimed in the debtor's collateral. Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

Financing statement as security agreement. - A financing statement, in its usual statutory form and disclosing no terms of a security agreement, does not additionally serve as a security agreement. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

The Uniform Commercial Code makes no provision for a naked financing statement to be enforced as a security agreement. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

It is simply notice of security interest in collateral. - A financing statement, by which a security interest is said to be perfected, is simply a notice that the secured party who has filed it may have a security interest in the collateral which the statement describes. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

The Uniform Commercial Code has adopted a system of "notice filing" which contemplates further inquiry in order to determine whether a given asset is covered by a security agreement. Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

The broad public policy rationale behind the filing of financing statements is to incorporate a uniform system of notice filing. This system contemplates further inquiry in order to determine whether a given asset is covered by a security agreement. Pischke v. Murray, 11 Bankr. 913 (Bankr. E.D. Va. 1981).

Subsection (8) of former § 8.9-402 demonstrated clearly that the purpose of the section was to create a system of notice filing which contemplated further inquiry by a party in order to determine whether a particular asset was covered by a security agreement. Canfield v. Small Bus. Admin. (In re Tebbs Constr. Co.), 39 Bankr. 742 (Bankr. E.D. Va. 1984).

And statement need only be sufficiently descriptive to generate further inquiry. - All that is required under the Uniform Commercial Code is that the financing statement be sufficiently descriptive so as reasonably to generate further inquiry. Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

In the context of termination, there is no necessity for the type of notice required by this section. The secured creditor can comply with former § 8.9-404 by simply providing a statement to the effect that it no longer claims a security interest under the financing statement identified by the number on the termination statement. There is no suggestion in former § 8.9-404 or its comments that a prospective creditor must make further inquiry to the secured party of the kind contemplated in this section. Crestar Bank v. Neal, 960 F.2d 1242 (4th Cir. 1992).

Two documents required for perfected security interest. - Generally, two documents are required to create a perfected security interest in a debtor's collateral. First, a security agreement must give a creditor an interest in the collateral. The second document required is a financing statement, a writing filed for public record. Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

Financing statement meets its burden of giving reasonable notice fairly easily. All that is required is that the financing statement be sufficiently descriptive so as reasonably to generate further inquiry. Mahon v. United States/Farmers Home Admin., 82 Bankr. 33 (Bankr. W.D. Va. 1988).

Collateral need not be listed specifically. - The financing statement need not list collateral specifically. It is meant only to give notice of a possible security interest in the described collateral. It imposes upon the world a further duty of reasonable inquiry into the existence and content of a security interest in the subject collateral. Mahon v. United States/Farmers Home Admin., 82 Bankr. 33 (Bankr. W.D. Va. 1988).

A termination statement is a unique filing created by a different code section, former § 8.9-404, than the one governing financing statements and amendments, this section. Its effect on a secured interest is dramatic and final. Thus, bank's failure to identify the statement as partial release of collateral and instead specifically identifying it as a termination statement cannot be considered a minor error or as not seriously misleading. Crestar Bank v. Neal, 960 F.2d 1242 (4th Cir. 1992).

"Contract right" is a term that is both absorbed into the definition of "account," and is used to define "general intangible." It is impossible for the term to have a single meaning and be incorporated in both mutually exclusive categories. Dominion Bank v. Wilson, 86 Bankr. 871 (W.D. Va. 1988), rev'd on other grounds, 867 F.2d 203 (4th Cir. 1989).

The use of the term "accounts receivable" is an adequate description of a contract within the context of the Uniform Commercial Code's system of notice filing. Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

Description of collateral as "accounts receivable" includes security interest in "accounts". - A security interest in "accounts" was properly perfected by financing statements which described the collateral as "accounts receivable." Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

Even if "accounts receivable" is not synonymous with "accounts," it is sufficiently descriptive, as witnessed by the definition in the Official Comments, its use in other jurisdictions, and the analysis of Uniform Commercial Code commentators, to put third parties on notice that a security interest in a contract may be claimed and that further inquiry is necessary. Girard Trust Co. v. Strickler, 458 F.2d 435 (4th Cir. 1972).

"Machinery and equipment" is sufficient description. - Subsection (1) of former § 8.9-402 stated that a financing statement contain a statement "indicating the types, or describing the items, of collateral." A financing statement provided only the language "machinery and equipment" that the financing statement would have a sufficient description and, therefore, be a valid financing statement. Canfield v. Small Bus. Admin. (In re Tebbs Constr. Co.), 39 Bankr. 742 (Bankr. E.D. Va. 1984).

The filing of a financing statement is but a single step in the means by which the rights and priorities of a secured party are "perfected." In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

In evaluating the efficacy of the "notice filing" requirements in a particular situation, the requirement that the debtor sign the financing statement should not be minimized. Pischke v. Murray, 11 Bankr. 913 (Bankr. E.D. Va. 1981).

Burden on secured creditor. - Although seemingly inequitable, the comments to subsection (7) of former § 8.9-402 clearly manifest a decision by the drafters of former Article 9 (see now Article 9A) that merely examining the files is not the only burden placed upon a potential secured creditor. Rather, the drafters' comments make it clear that the bank has a duty to trace the chain of title of the proposed collateral to prior owners and then search the filed financing statements in the name of each former owner of the property to see if any security interest existed at the time the potential debtor acquired the property. Thus, the drafters appear to have reconciled any conflict by favoring certainty with respect to a secured party's security interest. This result is achieved by placing additional searching requirements upon a potential secured party. Therefore, although the searcher's task is increased, the notice system does not break down. Richmond Fixture & Equip. Co. v. Hyman (In re S. Properties, Inc.), 44 Bankr. 838 (Bankr. E.D. Va. 1984).

Retention of security interest in collateral by seller found. - The security agreement specifically provided that the collateral would not be sold or transferred. There was no evidence that the seller expressly authorized or consented to the transfer. Consequently, despite subsequent transfers of the collateral, the sellers retained their security interest in the collateral in accordance with former § 8.9-402 and former § 8.9-306. Phillips v. Ball & Hunt Enters., Inc., 933 F. Supp. 1290 (W.D. Va. 1996).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-402(1), (5), (6).

2. "Notice Filing." This section adopts the system of "notice filing." What is required to be filed is not, as under pre-UCC chattel mortgage and conditional sales acts, the security agreement itself, but only a simple record providing a limited amount of information (financing statement). The financing statement may be filed before the security interest attaches or thereafter. See subsection (d). See also section 9-308(a) (contemplating situations in which a financing statement is filed before a security interest attaches).

The notice itself indicates merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs. Section 9-210 provides a statutory procedure under which the secured party, at the debtor's request, may be required to make disclosure. However, in many cases, information may be forthcoming without the need to resort to the formalities of that section.

Notice filing has proved to be of great use in financing transactions involving inventory, accounts, and chattel paper, because it obviates the necessity of refiling on each of a series of transactions in a continuing arrangement under which the collateral changes from day to day. However, even in the case of filings that do not necessarily involve a series of transactions (e.g., a loan secured by a single item of equipment), a financing statement is effective to encompass transactions under a security agreement not in existence and not contemplated at the time the notice was filed, if the indication of collateral in the financing statement is sufficient to cover the collateral concerned. Similarly, a financing statement is effective to cover after-acquired property of the type indicated and to perfect with respect to future advances under security agreements, regardless of whether after-acquired property or future advances are mentioned in the financing statement and even if not in the contemplation of the parties at the time the financing statement was authorized to be filed.

3. Debtor's Signature; Required Authorization. Subsection (a) sets forth the simple formal requirements for an effective financing statement. These requirements are: (1) The debtor's name; (2) the name of a secured party or representative of the secured party; and (3) an indication of the collateral.

Whereas former section 9-402(1) required the debtor's signature to appear on a financing statement, this article contains no signature requirement. The elimination of the signature requirement facilitates paperless filing. (However, as PEB Commentary No. 15 indicates, a paperless financing statement was sufficient under former article 9.) Elimination of the signature requirement also makes the exceptions provided by former section 9-402(2) unnecessary.

The fact that this article does not require that an authenticating symbol be contained in the public record does not mean that all filings are authorized. Rather, section 9-509(a) entitles a person to file an initial financing statement, an amendment that adds collateral, or an amendment that adds a debtor only if the debtor authorizes the filing, and section 9-509(d) entitles a person other than the debtor to file a termination statement only if the secured party of record authorizes the filing. Of course, a filing has legal effect only to the extent it is authorized. See section 9-510.

Law other than this article, including the law with respect to ratification of past acts, generally determines whether a person has the requisite authority to file a record under this article. See section 1-103. However, under section 9-509(b), the debtor's authentication of (or becoming bound by) a security agreement ipso facto constitutes the debtor's authorization of the filing of a financing statement covering the collateral described in the security agreement. The secured party need not obtain a separate authorization.

Section 9-625 provides a remedy for unauthorized filings. Making an unauthorized filing also may give rise to civil or criminal liability under other law. In addition, this article contains provisions that assist in the discovery of unauthorized filings and the amelioration of their practical effect. For example, section 9-518 provides a procedure whereby a person may add to the public record a statement to the effect that a financing statement indexed under the person's name was wrongfully filed, and section 9-509(d) entitles any person to file a termination statement if the secured party of record fails to comply with its obligation to file or send one to the debtor, the debtor authorizes the filing, and the termination statement so indicates. However, the filing office is neither obligated nor permitted to inquire into issues of authorization. See section 9-520(a).

4. Certain Other Requirements. Subsection (a) deletes other provisions of former section 9-402(1) because they seem unwise (real-property description for financing statements covering crops), unnecessary (adequacy of copies of financing statements), or both (copy of security agreement as financing statement). In addition, the filing office must reject a financing statement lacking certain other information formerly required as a condition of perfection (e.g., an address for the debtor or secured party). See sections 9-516(b) and 9-520(a). However, if the filing office accepts the record, it is effective nevertheless. See section 9-520(c).

5. Real-Property-Related Filings. Subsection (b) contains the requirements for financing statements filed as fixture filings and financing statements covering timber to be cut or minerals and minerals-related accounts constituting as-extracted collateral. A description of the related real property must be sufficient to reasonably identify it. See section 9-108. This formulation rejects the view that the real property description must be by metes and bounds, or otherwise conforming to traditional real-property practice in conveyancing, but, of course, the incorporation of such a description by reference to the recording data of a deed, mortgage, or other instrument containing the description should suffice under the most stringent standards. The proper test is that a description of real property must be sufficient so that the financing statement will fit into the real property search system and be found by a real property searcher. Under the optional language in subsection (b)(3), the test of adequacy of the description is whether it would be adequate in a record of a mortgage of the real property. As suggested in the legislative note, more detail may be required if there is a tract indexing system or a land registration system.

If the debtor does not have an interest of record in the real property, a real-property-related financing statement must show the name of a record owner, and section 9-519(d) requires the financing statement to be indexed in the name of that owner. This requirement also enables financing statements covering as-extracted collateral or timber to be cut and financing statements filed as fixture filings to fit into the real property search system.

6. Record of Mortgage Effective as Financing Statement. Subsection (c) explains when a record of a mortgage is effective as a financing statement filed as a fixture filing or to cover timber to be cut or as-extracted collateral. Use of the term "record of a mortgage" recognizes that in some systems the record actually filed is not the record pursuant to which a mortgage is created. Moreover, "mortgage" is defined in section 9-102 as an "interest in real property," not as the record that creates or evidences the mortgage or the record that is filed in the public recording systems. A record creating a mortgage may also create a security interest with respect to fixtures (or other goods) in conformity with this article. A single agreement creating a mortgage on real property and a security interest in chattels is common and useful for certain purposes. Under subsection (c), the recording of the record evidencing a mortgage (if it satisfies the requirements for a financing statement) constitutes the filing of a financing statement as to the fixtures (but not, of course, as to other goods). Section 9-515(g) makes the usual five-year maximum life for financing statements inapplicable to mortgages that operate as fixture filings under section 9-502(c). Such mortgages are effective for the duration of the real property recording.

Of course, if a combined mortgage covers chattels that are not fixtures, a regular financing statement filing is necessary with respect to the chattels, and subsection (c) is inapplicable. Likewise, a financing statement filed as a "fixture filing" is not effective to perfect a security interest in personal property other than fixtures.

In some cases it may be difficult to determine whether goods are or will become fixtures. Nothing in this part prohibits the filing of a "precautionary" fixture filing, which would provide protection in the event goods are determined to be fixtures. The fact of filing should not be a factor in the determining whether goods are fixtures. Cf. section 9-505(b).

CASE NOTES

The absence of a debtor's signature on a financing statement is not a minor error. Pischke v. Murray, 11 Bankr. 913 (Bankr. E.D. Va. 1981) (decided under prior law).

Secured party's use of trade name not misleading. - Under the facts surrounding the case, secured party's use of its trade name on some of its financing statements covering debtor's assets was not seriously misleading. However, secured parties should use their legal names rather than trade names in order to prevent any possible confusion and subsequent litigation. Unsecured Creditors Comm. v. Marepcon Fin. Corp., 907 F.2d 1430 (4th Cir. 1990) (decided under prior law).

Seriously misleading error. - Search using the correct debtor name under the Virginia State Corporation Commission's search logic must reveal the financing statement filed under the incorrect name or it will be deemed seriously misleading; a creditor's financing statement was seriously misleading under § 8.9A-506(a) and was insufficient to perfect the creditor's security interest because an official search certified by the Virginia State Corporation Commission, under the debtor's correct name, including the word "Inc.," failed to disclose the financing statement. Official Comm. of Unsecured Creditors for Tyringham Holdings, Inc. v. Suna Bros., Inc. (In re Tyringham Holdings, Inc.), 354 Bankr. 363, 2006 Bankr. LEXIS 3332 (Bankr. E.D. Va. 2006).

OFFICIAL COMMENT

Comment. - 1. Source. Subsections (a)(4)(A), (b), and (c) derive from former section 9-402(7); otherwise, new.

2. Debtor's Name. The requirement that a financing statement provide the debtor's name is particularly important. Financing statements are indexed under the name of the debtor, and those who wish to find financing statements search for them under the debtor's name. Subsection (a) explains what the debtor's name is for purposes of a financing statement.

1. Registered Organizations. As a general matter, if the debtor is a "registered organization" (defined in Section 9-102 so as to ordinarily include corporations, limited partnerships, limited liability companies, and statutory trusts), then the debtor's name is the name shown on the "public organic record" of the debtor's "jurisdiction of organization" (both also defined in Section 9-102).
2. Collateral Held in a Trust. When a financing statement covers collateral that is held in a trust that is a registered organization, subsection (a)(1) governs the name of the debtor. If, however, the collateral is held in a trust that is not a registered organization, subsection (a)(3) applies. (As used in this Article, collateral "held in a trust" includes collateral as to which the trust is the debtor as well as collateral as to which the trustee is the debtor.) This subsection adopts a convention that generally results in the name of the trust or the name of the trust's settlor being provided as the name of the debtor on the financing statement, even if, as typically is the case with common-law trusts, the "debtor" (defined in Section 9-102) is a trustee acting with respect to the collateral. This convention provides more accurate information and eases the burden for searchers, who otherwise would have difficulty with respect to debtor trustees that are large financial institutions.

   More specifically, if a trust's organic record specifies a name for the trust, subsection (a)(3) requires the financing statement to provide, as the name of the debtor, the name for the trust specified in the organic record. In addition, the financing statement must indicate, in a separate part of the financing statement, that the collateral is held in a trust.

   If the organic record of the trust does not specify a name for the trust, the name required for the financing statement is the name of the settlor or, in the case of a testamentary trust, the testator, in each case as determined under subsection (h). In addition, the financing statement must provide sufficient additional information to distinguish the trust from other trusts having one or more of the same settlors or the same testator. In many cases an indication of the date on which the trust was settled will satisfy this requirement. If neither the name nor the additional information indicates that the collateral is held in a trust, the financing statement must indicate that fact, but not as part of the debtor's name.

   Neither the indication that the collateral is held in a trust nor the additional information that distinguishes the trust from other trusts having one or more of the same settlors or the same testator is part of the debtor's name. Nevertheless, a financing statement that fails to provide, in a separate part of the financing statement, any required indication or additional information does not sufficiently provide the name of the debtor under Sections 9-502(a) and 9-503(a)(3), does not "substantially satisfy the requirements" of Part 5 within the meaning of Section 9-506(a), and so is ineffective.

3. Collateral Administered by a Personal Representative. Subsection (a)(2) deals with collateral that is being administered by an executor, administrator, or other personal representative of a decedent. Even if, as often is the case, the representative is the "debtor" (defined in Section 9-102), the financing statement must provide the name of the decedent as the name of the debtor. Subsection (f) provides a safe harbor, under which the name of the decedent indicated on the order appointing the personal representative issued by the court having jurisdiction over the collateral is sufficient as the name of the decedent. If the order indicates more than one name for the decedent, the first name in the list qualifies under subsection (f); however, other names in the list also may qualify as the "name of the decedent" within the meaning of subsection (a)(2). In addition to providing the name of the decedent, the financing statement must indicate, in a separate part of the financing statement, that the collateral is being administered by a personal representative. Although the indication is not part of the debtor's name, a financing statement that fails to provide the indication does not sufficiently provide the name of the debtor under Sections 9-502(a) and 9-503(a)(2), does not "substantially satisfy[ ] the requirements" of Part 5 within the meaning of Section 9-506(a), and so is ineffective.
4. Individuals. This Article provides alternative approaches towards the requirement for providing the name of a debtor who is an individual.

   Alternative A. Alternative A distinguishes between two groups of individual debtors. For debtors holding an unexpired driver's license issued by the State where the financing statement is filed (ordinarily the State where the debtor maintains the debtor's principal residence), Alternative A requires that a financing statement provide the name indicated on the license. When a debtor does not hold an unexpired driver's license issued by the relevant State, the requirement can be satisfied in either of two ways. A financing statement is sufficient if it provides the "individual name" of the debtor. Alternatively, a financing statement is sufficient if it provides the debtor's surname (i.e., family name) and first personal name (i.e., first name other than the surname).

   Alternative B. Alternative B provides three ways in which a financing statement may sufficiently provide the name of an individual who is a debtor. The "individual name" of the debtor is sufficient, as is the debtor's surname and first personal name. If the individual holds an unexpired driver's license issued by the State where the financing statement is filed (ordinarily the State of the debtor's principal residence), the name indicated on the driver's license also is sufficient.

   Name indicated on the driver's license. A financing statement does not "provide the name of the individual which is indicated" on the debtor's driver's license unless the name it provides is the same as the name indicated on the license. This is the case even if the name indicated on the debtor's driver's license contains an error.

   Example 1: Debtor, an individual whose principal residence is in Illinois, grants a security interest to SP in certain business equipment. SP files a financing statement with the Illinois filing office. The financing statement provides the name appearing on Debtor's Illinois driver's license, "Joseph Allan Jones." Regardless of which Alternative is in effect in Illinois, this filing would be sufficient under Illinois' Section 9-503(a), even if Debtor's correct middle name is Alan, not Allan.

   A filing against "Joseph A. Jones" or "Joseph Jones" would not "provide the name of the individual which is indicated" on the debtor's driver's license. However, these filings might be sufficient if Alternative A is in effect in Illinois and Jones has no current (i.e., unexpired) Illinois driver's license, or if Illinois has enacted Alternative B.

   Determining the name that should be provided on the financing statement must not be done mechanically. The order in which the components of an individual's name appear on a driver's license differs among the States. Had the debtor in Example 1 obtained a driver's license from a different State, the license might have indicated the name as "Jones Joseph Allan." Regardless of the order on the driver's license, the debtor's surname must be provided in the part of the financing statement designated for the surname.

   Alternatives A and B both refer to a license issued by "this State." Perfection of a security interest by filing ordinarily is determined by the law of the jurisdiction in which the debtor is located. See Section 9-301(1). (Exceptions to the general rule are found in Section 9- 301(3) and (4), concerning fixture filings, timber to be cut, and as-extracted collateral.) A debtor who is an individual ordinarily is located at the individual's principal residence. See Section 9- 307(b). (An exception appears in Section 9-307(c).) Thus, a given State's Section 9-503 ordinarily will apply during any period when the debtor's principal residence is located in that State, even if during that time the debtor holds or acquires a driver's license from another State.

   When a debtor's principal residence changes, the location of the debtor under Section 9- 307 also changes and perfection by filing ordinarily will be governed by the law of the debtor's new location. As a consequence of the application of that jurisdiction's Section 9-316, a security interest that is perfected by filing under the law of the debtor's former location will remain perfected for four months after the relocation, and thereafter if the secured party perfects under the law of the debtor's new location. Likewise, a financing statement filed in the former location may be effective to perfect a security interest that attaches after the debtor relocates. See Section 9-316(h).

   Individual name of the debtor. Article 9 does not determine the "individual name" of a debtor. Nor does it determine which element or elements in a debtor's name constitute the surname. In some cases, determining the "individual name" of a debtor may be difficult, as may determining the debtor's surname. This is because in the case of individuals, unlike registered organizations, there is no public organic record to which reference can be made and from which the name and its components can be definitively determined.

   Names can take many forms in the United States. For example, whereas a surname is often colloquially referred to as a "last name," the sequence in which the elements of a name are presented is not determinative. In some cultures, the surname appears first, while in others it may appear in a location that is neither first nor last. In addition, some surnames are composed of multiple elements that, taken together, constitute a single surname. These elements may or may not be separated by a space or connected by a hyphen, "i," or "y." In other instances, some or all of the same elements may not be part of the surname. In some cases, a debtor's entire name might be composed of only a single element, which should be provided in the part of the financing statement designated for the surname.

   In disputes as to whether a financing statement sufficiently provides the "individual name" of a debtor, a court should refer to any non-UCC law concerning names. However, case law about names may have developed in contexts that implicate policies different from those of Article 9. A court considering an individual's name for purposes of determining the sufficiency of a financing statement is not necessarily bound by cases that were decided in other contexts and for other purposes.

   Individuals are asked to provide their names on official documents such as tax returns and bankruptcy petitions. An individual may provide a particular name on an official document in response to instructions relating to the document rather than because the name is actually the individual's name. Accordingly, a court should not assume that the name an individual provides on an official document necessarily constitutes the "individual name" for purposes of the sufficiency of the debtor's name on a financing statement. Likewise, a court should not assume that the name as presented on an individual's birth certificate is necessarily the individual's current name.

   In applying non-UCC law for purposes of determining the sufficiency of a debtor's name on a financing statement, a court should give effect to the instruction in Section 1-103(a)(1) that the UCC "must be liberally construed and applied to promote its underlying purposes and policies," which include simplifying and clarifying the law governing commercial transactions. Thus, determination of a debtor's name in the context of the Article 9 filing system must take into account the needs of both filers and searchers. Filers need a simple and predictable system in which they can have a reasonable degree of confidence that, without undue burden, they can determine a name that will be sufficient so as to permit their financing statements to be effective. Likewise, searchers need a simple and predictable system in which they can have a reasonable degree of confidence that, without undue burden, they will discover all financing statements pertaining to the debtor in question. The court also should take into account the purpose of the UCC to make the law uniform among the various jurisdictions. See Section 1-103(a)(3).

   Of course, once an individual debtor's name has been determined to be sufficient for purposes of Section 9-503, a financing statement that provides a variation of that name, such as a "nickname" that does not constitute the debtor's name, does not sufficiently provide the name of the debtor under this section. Cf. Section 9-503(c) (a financing statement providing only a debtor's trade name is not sufficient).

   Note that, even if the name provided in an initial financing statement is correct, the filing office nevertheless must reject the financing statement if it does not identify an individual debtor's surname (e.g., if it is not clear whether the debtor's surname is Perry or Mason). See section 9-516(b)(3)(C).

   3. Secured Party's Name. New subsection (d) makes clear that when the secured party is a representative, a financing statement is sufficient if it names the secured party, whether or not it indicates any representative capacity. Similarly, a financing statement that names a representative of the secured party is sufficient, even if it does not indicate the representative capacity.

   Example 2: Debtor creates a security interest in favor of Bank X, Bank Y, and Bank Z, but not to their representative, the collateral agent (Bank A). The collateral agent is not itself a secured party. See section 9-102. Under sections 9-502(a) and 9-503(d), however, a financing statement is effective if it names as secured party Bank A and not the actual secured parties, even if it omits Bank A's representative capacity.

   Each person whose name is provided in an initial financing statement as the name of the secured party or representative of the secured party is a secured party of record. See section 9-511.

   4. Multiple Names. Subsection (e) makes explicit what is implicit under former article 9: A financing statement may provide the name of more than one debtor and secured party. See Section 1-106 (words in the singular include the plural). With respect to records relating to more than one debtor, see Section 9-520(d). With respect to financing statements providing the name of more than one secured party, see Sections 9-509(e) and 9-510(b).

CASE NOTES

Financing statement and security agreements furnished sufficient description of collateral. - Where the parties executed security agreements providing that the collateral described therein could be supplemented, i.e., added to, by financing statements signed by the debtors, financing statement, coupled with security agreements, furnished a sufficient description of the collateral under former § 8.9-110, and met the requirements of former § 8.9-203 (1) (a). Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

As between the parties, financing statement can supplement security agreements by adding collateral. - Nothing in the U.C.C. prohibits parties from contracting to supplement a security agreement with a separate document adding other collateral; thus, as between the parties, the financing statement can supplement the underlying security agreement by adding other collateral. Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106 , 353 S.E.2d 764 (1987).

A financing statement cannot add collateral not described in the security agreement. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

Creditor can describe part of collateral by item and another part by type. - There is nothing in the statutory language of this section which would either mandate or justify a holding that, if a creditor describes part of the collateral by item, he cannot describe another part by type. Hixon v. Credit Alliance Corp., 235 Va. 466 , 369 S.E.2d 169 (1988).

Notice that plow or tractor covered by lien. - A person reading the words "this financing statement covers farm and other equipment" would be on notice that a tractor or plow was encumbered by a lien. The financing statement simply does not need to describe the collateral; it need only indicate the "type." If one were to choose a general term to collectively describe a tractor, cultivator, plow, disc, corn picker and tobacco setter, the term "farm equipment" would be a logical description. Mahon v. United States/Farmers Home Admin., 82 Bankr. 33 (Bankr. W.D. Va. 1988).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-402(1).

2. Indication of Collateral. To comply with section 9-502(a), a financing statement must "indicate" the collateral it covers. A financing statement sufficiently indicates collateral claimed to be covered by the financing statement if it satisfies the purpose of conditioning perfection on the filing of a financing statement, i.e., if it provides notice that a person may have a security interest in the collateral claimed. See Section 9-502, Comment 2. In particular, an indication of collateral that would have satisfied the requirements of former Section 9-402(1) (i.e., "a statement indicating the types, or describing the items, of collateral") suffices under Section 9-502(a). An indication may satisfy the requirements of Section 9-502(a), even if it would not have satisfied the requirements of former Section 9-402(1).

This section provides two safe harbors. Under paragraph (1), a "description" of the collateral (as the term is explained in section 9-108) suffices as an indication for purposes of the sufficiency of a financing statement.

Debtors sometimes create a security interest in all, or substantially all, of their assets. To accommodate this practice, paragraph (2) expands the class of sufficient collateral references to embrace "an indication that the financing statement covers all assets or all personal property." If the property in question belongs to the debtor and is personal property, any searcher will know that the property is covered by the financing statement. Of course, regardless of its breadth, a financing statement has no effect with respect to property indicated but to which a security interest has not attached. Note that a broad statement of this kind (e.g., "all debtor's personal property") would not be a sufficient "description" for purposes of a security agreement. See sections 9-108 and 9-203(b)(3)(A). It follows that a somewhat narrower description than "all assets," e.g., "all assets other than automobiles," is sufficient for purposes of this section, even if it does not suffice for purposes of a security agreement.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-408.

2. Precautionary Filing. Occasionally, doubts arise concerning whether a transaction creates a relationship to which this article or its filing provisions apply. For example, questions may arise over whether a "lease" of equipment in fact creates a security interest or whether the "sale" of payment intangibles in fact secures an obligation, thereby requiring action to perfect the security interest. This section, which derives from former section 9-408, affords the option of filing of a financing statement with appropriate changes of terminology but without affecting the substantive question of classification of the transaction.

3. Changes from Former Section 9-408. This section expands the rule of former Section 9-408 to embrace more generally other bailments and transactions, as well as sales transactions, primarily sales of payment intangibles and promissory notes. It provides the same benefits for compliance with a statute or treaty described in Section 9-311(a) that former Section 9-408 provided for filing, in connection with the use of terms such as "lessor," "consignor," etc. The references to "owner" and "registered owner" are intended to address, for example, the situation where a putative lessor is the registered owner of an automobile covered by a certificate of title and the transaction is determined to create a security interest. Although this section provides that the security interest is perfected, the relevant certificate of title statute may expressly provide to the contrary or may be ambiguous. If so, it may be necessary or advisable to amend the certificate of title statute to ensure that perfection of the security interest will be achieved.

As did former Section 1-201 , former Article 9 referred to transactions, including leases and consignments, "intended as security." This misleading phrase created the erroneous impression that the parties to a transaction can dictate how the law will classify it (e.g., as a bailment or as a security interest) and thus affect the rights of third parties. This article deletes the phrase wherever it appears. Subsection (b) expresses the principle more precisely by referring to a security interest that "secures an obligation."

4. Consignments. Although a "true" consignment is a bailment, the filing and priority provisions of former Article 9 applied to "true" consignments. See former Sections 2-326(3) and 9-114. A consignment "intended as security" created a security interest that was in all respects subject to former Article 9. This article subsumes most true consignments under the rubric of "security interest." See Sections 1-201 (37) (definition of "security interest"), 9-102 (definition of "consignment"), and 9-109(a)(4), 1-201 (b)(35) (definition of "security interest"). Nevertheless, it maintains the distinction between a (true) "consignment," as to which only certain aspects of Article 9 apply, and a so-called consignment that actually "secures an obligation," to which Article 9 applies in full. The revisions to this section reflect the change in terminology.

CASE NOTES

Error in further description where description as to type is sufficient. - Because a financing statement's use of "machinery and equipment" would be sufficient in itself, in an attempt to more specifically describe said machinery and equipment, an omission in such further description does not cause the description to be inadequate for purposes of subsection (1) of former § 8.9-402. The failure to further describe collateral where a description as to type alone would be sufficient does not cause the financing statement to be invalid. Canfield v. Small Bus. Admin. (In re Tebbs Constr. Co.), 39 Bankr. 742 (Bankr. E.D. Va. 1984) (decided under prior law).

Seriously misleading error in name of debtor. - Search using the correct debtor name under the Virginia State Corporation Commission's search logic must reveal the financing statement filed under the incorrect name or it will be deemed seriously misleading; a creditor's financing statement was seriously misleading under § 8.9A-506(a) and was insufficient to perfect the creditor's security interest because an official search certified by the Virginia State Corporation Commission, under the debtor's correct name, including the word "Inc.," failed to disclose the financing statement. Official Comm. of Unsecured Creditors for Tyringham Holdings, Inc. v. Suna Bros., Inc. (In re Tyringham Holdings, Inc.), 354 Bankr. 363, 2006 Bankr. LEXIS 3332 (Bankr. E.D. Va. 2006).

Review of irregular filing. - A court should, in reviewing an allegedly irregular attempt at U.C.C. filing, look closely at whether or not a "reasonably diligent searcher" would be misled by the irregularity. Strickler v. Thomas, 7 Bankr. 389 (Bankr. W.D. Va. 1980) (decided under prior law).

Amendment cannot perfect defective original. - An amendment to a financing statement should not be viewed as standing in its own right as a financing statement because, although an amendment may serve several purposes, it is an amendment which relates back to the original financing statement; therefore, it cannot perfect a security interest if the original was defective. Maremont Mktg., Inc. v. Marshall (In re G.G. Moss Co.), 9 Bankr. 47 (Bankr. E.D. Va. 1981), aff'd, 676 F.2d 692 (4th Cir. 1982) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-402(8).

2. Errors and Omissions. Like former section 9-402(8), subsection (a) is in line with the policy of this article to simplify formal requisites and filing requirements. It is designed to discourage the fanatical and impossibly refined reading of statutory requirements in which courts occasionally have indulged themselves. Subsection (a) provides the standard applicable to indications of collateral. Subsections (b) and (c), which are new, concern the effectiveness of financing statements in which the debtor's name is incorrect. Subsection (b) contains the general rule: A financing statement that fails sufficiently to provide the debtor's name in accordance with section 9-503(a) is seriously misleading as a matter of law. Subsection (c) provides an exception: If the financing statement nevertheless would be discovered in a search under the debtor's correct name, using the filing office's standard search logic, if any, then as a matter of law the incorrect name does not make the financing statement seriously misleading. A financing statement that is seriously misleading under this section is ineffective even if it is disclosed by (i) using a search logic other than that of the filing office to search the official records, or (ii) using the filing office's standard search logic to search a data base other than that of the filing office. For purposes of subsection (c), any name that satisfies Section 9-503(a) at the time of the search is a "correct name."

This section and Section 9-503 balance the interests of filers and searchers. Searchers are not expected to ascertain nicknames, trade names, and the like by which the debtor may be known and then search under each of them. Rather, it is the secured party's responsibility to provide the name of the debtor sufficiently in a filed financing statement. Subsection (c) sets forth the only situation in which a financing statement that fails sufficiently to provide the name of the debtor is not seriously misleading. As stated in subsection (b), if the name of the debtor provided on a financing statement is insufficient and subsection (c) is not satisfied, the financing statement is seriously misleading. Such a financing statement is ineffective even if the debtor is known in some contexts by the name provided on the financing statement and even if searchers know or have reason to know that the name provided on the financing statement refers to the debtor. Any suggestion to the contrary in a judicial opinion is incorrect.

To satisfy the requirements of Section 9-503(a)(2), a financing statement must indicate that the collateral is being administered by a personal representative. To satisfy the requirements of Section 9-503(a)(3), a financing statement must indicate that the collateral is held in a trust and provide additional information that distinguishes the trust from certain other trusts. The indications and additional information are not part of the debtor's name. Nevertheless, a financing statement that fails to provide an indication or the additional information when required does not sufficiently provide the name of the debtor under Sections 9-502(a) and 9- 503(a), does not "substantially satisfy[ ] the requirements" of Part 5 within the meaning of this section and so is ineffective.

In addition to requiring the debtor's name and an indication of the collateral, section 9-502(a) requires a financing statement to provide the name of the secured party or a representative of the secured party. Inasmuch as searches are not conducted under the secured party's name, and no filing is needed to continue the perfected status of security interest after it is assigned, an error in the name of the secured party or its representative will not be seriously misleading. However, in an appropriate case, an error of this kind may give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral. See section 1-103.

3. New Debtors. Subsection (d) provides that, in determining the extent to which a financing statement naming an original debtor is effective against a new debtor, the sufficiency of the financing statement should be tested against the name of the new debtor.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-402(7).

2. Scope of Section. This section deals with situations in which the information in a proper financing statement becomes inaccurate after the financing statement is filed. Compare section 9-338, which deals with situations in which a financing statement contains a particular kind of information concerning the debtor (i.e., the information described in section 9-516(b)(5)) that is incorrect at the time it is filed.

3. Post-Filing Disposition of Collateral. Under subsection (a), a financing statement remains effective even if the collateral is sold or otherwise disposed of. This subsection clarifies the third sentence of former section 9-402(7) by providing that a financing statement remains effective following the disposition of collateral only when the security interest or agricultural lien continues in that collateral. This result is consistent with the conclusion of PEB Commentary No. 3. Normally, a security interest does continue after disposition of the collateral. See section 9-315(a)(1). Law other than this article determines whether an agricultural lien survives disposition of the collateral.

As a consequence of the disposition, the collateral may be owned by a person other than the debtor against whom the financing statement was filed. Under subsection (a), the secured party remains perfected even if it does not correct the public record. For this reason, any person seeking to determine whether a debtor owns collateral free of security interests must inquire as to the debtor's source of title and, if circumstances seem to require it, search in the name of a former owner. Subsection (a) addresses only the sufficiency of the information contained in the financing statement. A disposition of collateral may result in loss of perfection for other reasons. See section 9-316.

Example: Dee Corp. is an Illinois corporation. It creates a security interest in its equipment in favor of Secured Party. Secured Party files a proper financing statement in Illinois. Dee Corp. sells an item of equipment to Bee Corp., a Pennsylvania corporation, subject to the security interest. The security interest continues, see section 9-315(a)(1), and remains perfected, see section 9-507(a), notwithstanding that the financing statement is filed under "D" (for Dee Corp.) and not under "B." However, because Bee Corp. is located in Pennsylvania and not Illinois, see section 9-307, unless Secured Party perfects under Pennsylvania law within one year after the transfer, its security interest will become unperfected and will be deemed to have been unperfected against purchasers of the collateral. See section 9-316.

4. Other Post-Filing Changes. Subsection (b) provides that, as a general matter, post-filing changes that render a financing statement and seriously misleading have no effect on a financing statement. The financing statement remains effective. It is subject to two exceptions: Sections 9-507(c) and 9-508. Section 9-508 addresses the effectiveness of a financing statement filed against an original debtor when a new debtor becomes bound by the original debtor's security agreement. It is discussed in the comments to that section. Section 9-507(c) addresses cases in which a filed financing statement provides a name that, at the time of filing, satisfies the requirements of Section 9-503(a) with respect to the named debtor but, at a later time, no longer does so.

Example 1: Debtor, an individual whose principal residence is in California, grants a security interest to SP in certain business equipment. SP files a financing statement with the California filing office. Alternative A is in effect in California. The financing statement provides the name appearing on Debtor's California driver's license, "James McGinty." Debtor obtains a court order changing his name to "Roger McGuinn" but does not change his driver's license. Even after the court order issues, the name provided for the debtor in the financing statement is sufficient under Section 9-503(a). Accordingly, Section 9-507(c) does not apply.

The same result would follow if Alternative B is in effect in California.

Under Section 9-503(a)(4) (Alternative A), if the debtor holds a current (i.e., unexpired) driver's license issued by the State where the financing statement is filed, the name required for the financing statement is the name indicated on the license that was issued most recently by that State. If the debtor does not have a current driver's license issued by that State, then the debtor's name is determined under subsection (a)(5). It follows that a debtor's name may change, and a financing statement providing the name on the debtor's then-current driver's license may become seriously misleading, if the license expires and the debtor's name under subsection (a)(5) is different. The same consequences may follow if a debtor's driver's license is renewed and the names on the licenses differ.

Example 2: The facts are as in Example 1. Debtor's driver's license expires one year after the entry of the court order changing Debtor's name. Debtor does not renew the license. Upon expiration of the license, the name required for sufficiency by Section 9- 503(a) is the individual name of the debtor or the debtor's surname and first personal name. The name "James McGinty" has become insufficient.

Example 3: The facts are as in Example 1. Before the license expires, Debtor renews the license. The name indicated on the new license is "Roger McGuinn." Upon issuance of the new license, "James McGinty" becomes insufficient as the debtor's name under Section 9-503(a).

The same results would follow if Alternative B is in effect in California (assuming that, following the issuance of the court order, "James McGinty" is neither the individual name of the debtor nor the debtor's surname and first personal name).

Even if the name provided as the name of the debtor becomes insufficient under Section 9-503(a), the filed financing statement does not become seriously misleading, and Section 9- 507(c) does not apply, if the financing statement can be found by searching under the debtor's "correct" name, using the filing office's standard search logic. See Section 9-506. Any name that satisfies Section 9-503(a) at the time of the search is a "correct name" for these purposes. Thus, assuming that a search of the records of the California filing office under "Roger McGuinn," using the filing office's standard search logic, would not disclose a financing statement naming "James McGinty," the financing statement in Examples 2 and 3 has become seriously misleading and Section 9-507(c) applies.

If a filed financing statement becomes seriously misleading because the name it provides for a debtor becomes insufficient, the financing statement, unless amended to provide a sufficient name for the debtor, is effective only to perfect a security interest in collateral acquired by the debtor before, or within four months after, the change. If an amendment that provides a sufficient name is filed within four months after the change, the financing statement as amended would be effective also with respect to collateral acquired more than four months after the change. If an amendment that provides a sufficient name is filed more than four months after the change, the financing statement as amended would be effective also with respect to collateral acquired more than four months after the change, but only from the time of the filing of the amendment.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. The Problem. Section 9-203(d) and (e) and this section deal with situations where one party (the "new debtor") becomes bound as debtor by a security agreement entered into by another person (the "original debtor"). These situations often arise as a consequence of changes in business structure. For example, the original debtor may be an individual debtor who operates a business as a sole proprietorship and then incorporates it. Or, the original debtor may be a corporation that is merged into another corporation. Under both former article 9 and this article, collateral that is transferred in the course of the incorporation or merger normally would remain subject to a perfected security interest. See sections 9-315(a)(1) and 9-507(a). Former article 9 was less clear with respect to whether an after-acquired property clause in a security agreement signed by the original debtor would be effective to create a security interest in property acquired by the new corporation or the merger survivor and, if so, whether a financing statement filed against the original debtor would be effective to perfect the security interest. This section and sections 9-203(d) and (e) are a clarification.

3. How New Debtor Becomes Bound. Normally, a security interest is unenforceable unless the debtor has authenticated a security agreement describing the collateral. See section 9-203(b). New section 9-203(e) creates an exception, under which a security agreement entered into by one person is effective with respect to the property of another. This exception comes into play if a "new debtor" becomes bound as debtor by a security agreement entered into by another person (the "original debtor"). (The quoted terms are defined in section 9-102.) If a new debtor does become bound, then the security agreement entered into by the original debtor satisfies the security-agreement requirement of section 9-203(b)(3) as to existing or after-acquired property of the new debtor to the extent the property is described in the security agreement. In that case, no other agreement is necessary to make a security interest enforceable in that property. See section 9-203(e).

Section 9-203(d) explains when a new debtor becomes bound by an original debtor's security agreement. Under section 9-203(d)(1), a new debtor becomes bound as debtor if, by contract or operation of other law, the security agreement becomes effective to create a security interest in the new debtor's property. For example, if the applicable corporate law of mergers provides that when A Corp merges into B Corp, B Corp becomes a debtor under A Corp's security agreement, then B Corp would become bound as debtor following such a merger. Similarly, B Corp would become bound as debtor if B Corp contractually assumes A's obligations under the security agreement.

Under certain circumstances, a new debtor becomes bound for purposes of this article even though it would not be bound under other law. Under section 9-203(d)(2), a new debtor becomes bound when, by contract or operation of other law, it (i) becomes obligated not only for the secured obligation but also generally for the obligations of the original debtor and (ii) acquires or succeeds to substantially all the assets of the original debtor. For example, some corporate laws provide that, when two corporations merge, the surviving corporation succeeds to the assets of its merger partner and "has all liabilities" of both corporations. In the case where, for example, A Corp merges into B Corp (and A Corp ceases to exist), some people have questioned whether A Corp's grant of a security interest in its existing and after-acquired property becomes a "liability" of B Corp, such that B Corp's existing and after-acquired property becomes subject to a security interest in favor of A Corp's lender. Even if corporate law were to give a negative answer, under section 9-203(d)(2), B Corp would become bound for purposes of section 9-203(e) and this section. The "substantially all of the assets" requirement of section 9-203(d)(2) excludes sureties and other secondary obligors as well as persons who become obligated through veil piercing and other nonsuccessorship doctrines. In most cases, it will exclude successors to the assets and liabilities of a division of a debtor.

4. When Financing Statement Effective Against New Debtor. Subsection (a) provides that a filing against the original debtor generally is effective to perfect a security interest in collateral that a new debtor has at the time it becomes bound by the original debtor's security agreement and collateral that it acquires after the new debtor becomes bound. Under subsection (b), however, if the filing against the original debtor is seriously misleading as to the new debtor's name, the filing is effective as to collateral acquired by the new debtor more than four months after the new debtor becomes bound only if a person files during the four-month period an initial financing statement providing the name of the new debtor. Compare Section 9-507(c) (four-month period of effectiveness with respect to collateral acquired by a debtor after the name provided for the debtor becomes insufficient as the name of the debtor). As to the meaning of "initial financing statement" in this context, see Section 9-512, Comment 5.

5. Transferred Collateral. This section does not apply to collateral transferred by the original debtor to a new debtor. See subsection (c). Under those circumstances, the filing against the original debtor continues to be effective until it lapses or perfection is lost for another reason. See sections 9-316, 9-507(a).

6. Priority. Section 9-326 governs the priority contest between a secured creditor of the original debtor and a secured creditor of the new debtor.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Scope and Approach of This Section. This section collects in one place most of the rules determining whether a record may be filed. Section 9-510 explains the extent to which a filed record is effective. Under these sections, the identity of the person who effects a filing is immaterial. The filing scheme contemplated by this part does not contemplate that the identity of a "filer" will be a part of the searchable records. This is consistent with, and a necessary aspect of, eliminating signatures or other evidence of authorization from the system. (Note that the 1972 amendments to this article eliminated the requirement that a financing statement contain the signature of the secured party.) As long as the appropriate person authorizes the filing, or, in the case of a termination statement, the debtor is entitled to the termination, it is insignificant whether the secured party or another person files any given record. The question of authorization is one for the court, not the filing office. However, a filing office may choose to employ authentication procedures in connection with electronic communications, e.g., to verify the identity of a filer who seeks to charge the filing fee.

3. Unauthorized Filings. Records filed in the filing office do not require signatures for their effectiveness. Subsection (a)(1) substitutes for the debtor's signature on a financing statement the requirement that the debtor authorize in an authenticated record the filing of an initial financing statement or an amendment that adds collateral. Also, under subsection (a)(1), if an amendment adds a debtor, the debtor who is added must authorize the amendment. A person who files an unauthorized record in violation of subsection (a)(1) is liable under section 9-625 for actual and statutory damages. Of course, a filed financing statement is ineffective to perfect a security interest if the filing is not authorized. See section 9-510(a). Law other than this article, including the law with respect to ratification of past acts, generally determines whether a person has the requisite authority to file a record under this section. See sections 1-103 and 9-502, Comment 3. This Article applies to other issues, such as the priority of a security interest perfected by the filing of a financing statement. See Section 9-322, Comment 4.

4. Ipso Facto Authorization. Under subsection (b), the authentication of a security agreement ipso facto constitutes the debtor's authorization of the filing of a financing statement covering the collateral described in the security agreement. The secured party need not obtain a separate authorization. Similarly, a new debtor's becoming bound by a security agreement ipso facto constitutes the new debtor's authorization of the filing of a financing statement covering the collateral described in the security agreement by which the new debtor has become bound. And, under subsection (c), the acquisition of collateral in which a security interest continues after disposition under section 9-315(a)(1)(A) ipso facto constitutes an authorization to file an initial financing statement against the person who acquired the collateral. The authorization to file an initial financing statement also constitutes an authorization to file a record covering actual proceeds of the original collateral, even if the security agreement is silent as to proceeds.

Example 1: Debtor authenticates a security agreement creating a security interest in Debtor's inventory in favor of Secured Party. Secured Party files a financing statement covering inventory and accounts. The financing statement is authorized insofar as it covers inventory and unauthorized insofar as it covers accounts. (Note, however, that the financing statement will be effective to perfect a security interest in accounts constituting proceeds of the inventory to the same extent as a financing statement covering only inventory.)

Example 2: Debtor authenticates a security agreement creating a security interest in Debtor's inventory in favor of Secured Party. Secured Party files a financing statement covering inventory. Debtor sells some inventory, deposits the buyer's payment into a deposit account, and withdraws the funds to purchase equipment. As long as the equipment can be traced to the inventory, the security interest continues in the equipment. See section 9-315(a)(1)(B). However, because the equipment was acquired with cash proceeds, the financing statement becomes ineffective to perfect the security interest in the equipment on the 21st day after the security interest attaches to the equipment unless Secured Party continues perfection beyond the 20-day period by filing a financing statement against the equipment or amending the filed financing statement to cover equipment. See section 9-315(d). Debtor's authentication of the security agreement authorizes the filing of an initial financing statement or amendment covering the equipment, which is "property that becomes collateral under section 9-315(a)(1)(B)." See section 9-509(b)(2).

5. Agricultural Liens. Under subsection (a)(2), the holder of an agricultural lien may file a financing statement covering collateral subject to the lien without obtaining the debtor's authorization. Because the lien arises as matter of law, the debtor's consent is not required. A person who files an unauthorized record in violation of this subsection is liable under section 9-625(e) for a statutory penalty and damages.

6. Amendments; Termination Statements Authorized by Debtor. Most amendments may not be filed unless the secured party of record, as determined under section 9-511, authorizes the filing. See subsection (d)(1). However, under subsection (d)(2), the authorization of the secured party of record is not required for the filing of a termination statement if the secured party of record failed to send or file a termination statement as required by section 9-513, the debtor authorizes it to be filed, and the termination statement so indicates. An authorization to file a record under subsection (d) is effective even if the authorization is not in an authenticated record. Compare subsection (a)(1). However, both the person filing the record and the person giving the authorization may wish to obtain and retain a record indicating that the filing was authorized.

7. Multiple Secured Parties of Record. Subsection (e) deals with multiple secured parties of record. It permits each secured party of record to authorize the filing of amendments. However, section 9-510(b) protects the rights and powers of one secured party of record from the effects of filings made by another secured party of record. See section 9-510, comment 3.

8. Successor to Secured Party of Record. A person may succeed to the powers of the secured party of record by operation of other law, e.g., the law of corporate mergers. In that case, the successor has the power to authorize filings within the meaning of this section.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Ineffectiveness of Unauthorized or Overbroad Filings. Subsection (a) provides that a filed financing statement is effective only to the extent it was filed by a person entitled to file it.

Example 1: Debtor authorizes the filing of a financing statement covering inventory. Under section 9-509, the secured party may file a financing statement covering only inventory; it may not file a financing statement covering other collateral. The secured party files a financing statement covering inventory and equipment. This section provides that the financing statement is effective only to the extent the secured party may file it. Thus, the financing statement is effective to perfect a security interest in inventory but ineffective to perfect a security interest in equipment.

3. Multiple Secured Parties of Record. Section 9-509(e) permits any secured party of record to authorize the filing of most amendments. Subsection (b) of this section prevents a filing authorized by one secured party of record from affecting the rights and powers of another secured party of record without the latter's consent.

Example 2: Debtor creates a security interest in favor of A and B. The filed financing statement names A and B as the secured parties. An amendment deleting some collateral covered by the financing statement is filed pursuant to B's authorization. Although B's security interest in the deleted collateral becomes unperfected, A's security interest remains perfected in all the collateral.

Example 3: Debtor creates a security interest in favor of A and B. The financing statement names A and B as the secured parties. A termination statement is filed pursuant to B's authorization. Although the effectiveness of the financing statement terminates with respect to B's security interest, A's rights are unaffected. That is, the financing statement continues to be effective to perfect A's security interest.

4. Continuation Statements. A continuation statement may be filed only within the six months immediately before lapse. See section 9-515(d). The filing office is obligated to reject a continuation statement that is filed outside the six-month period. See sections 9-516(b)(7) and 9-520(a). Subsection (c) provides that if the filing office fails to reject a continuation statement that is not filed in a timely manner, the continuation statement is ineffective nevertheless.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Secured Party of Record. This new section explains how the secured party of record is to be determined. If SP-1 is named as the secured party in an initial financing statement, it is the secured party of record. Similarly, if an initial financing statement reflects a total assignment from SP-0 to SP-1, then SP-1 is the secured party of record. See subsection (a). If, subsequently, an amendment is filed assigning SP-1's status to SP-2, then SP-2 becomes the secured party of record in place of SP-1. The same result obtains if a subsequent amendment deletes the reference to SP-1 and substitutes therefor a reference to SP-2. If, however, a subsequent amendment adds SP-2 as a secured party but does not purport to remove SP-1 as a secured party, then SP-2 and SP-1 each is a secured party of record. See subsection (b). An amendment purporting to remove the only secured party of record without providing a successor is ineffective. See section 9-512(e). At any point in time, all effective records that comprise a financing statement must be examined to determine the person or persons that have the status of secured party of record.

3. Successor to Secured Party of Record. Application of other law may result in a person succeeding to the powers of a secured party of record. For example, if the secured party of record (A) merges into another corporation (B) and the other corporation (B) survives, other law may provide that B has all of A's powers. In that case, B is authorized to take all actions under this part that A would have been authorized to take. Similarly, acts taken by a person who is authorized under generally applicable principles of agency to act on behalf of the secured party of record are effective under this part.

CASE NOTES

A filing specifically described as a termination statement, for which provision was made in former § 8.9-404, was not the kind of partial release contemplated by former § 8.9-406. Crestar Bank v. Neal, 960 F.2d 1242 (4th Cir. 1992) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-402(4).

2. Changes to Financing Statements. This section addresses changes to financing statements, including addition and deletion of collateral. Although termination statements, assignments, and continuation statements are types of amendments, this article follows former article 9 and contains separate sections containing additional provisions applicable to particular types of amendments. See section 9-513 (termination statements); 9-514 (assignments); and 9-515 (continuation statements). One should not infer from this separate treatment that this article requires a separate amendment to accomplish each change. Rather, a single amendment would be legally sufficient to, e.g., add collateral and continue the effectiveness of the financing statement.

3. Amendments. An amendment under this article may identify only the information contained in a financing statement that is to be changed; alternatively, it may take the form of an amended and restated financing statement. The latter would state, for example, that the financing statement "is amended and restated to read as follows: . . ." References in this part to an "amended financing statement" are to a financing statement as amended by an amendment using either technique.

This section revises former section 9-402(4) to permit secured parties of record to make changes in the public record without the need to obtain the debtor's signature. However, the filing of an amendment that adds collateral or adds a debtor must be authorized by the debtor or it will not be effective. See sections 9-509(a) and 9-510(a).

4. Amendment Adding Debtor. An amendment that adds a debtor is effective, provided that the added debtor authorizes the filing. See section 9-509(a). However, filing an amendment adding a debtor to a previously filed financing statement affords no advantage over filing an initial financing statement against that debtor and may be disadvantageous. With respect to the added debtor, for purposes of determining the priority of the security interest, the time of filing is the time of the filing of the amendment, not the time of the filing of the initial financing statement. See subsection (d). However, the effectiveness of the financing statement lapses with respect to added debtor at the time it lapses with respect to the original debtor. See subsection (b).

5. Amendment Adding Debtor Name. Many states have enacted statutes governing the "conversion" of one organization organized under the law of that state, e.g., a corporation, into another such organization, e.g., a limited liability company. This Article defers to those statutes to determine whether the resulting organization is the same legal person as the initial, converting organization (albeit with a different name) or whether the resulting organization is a different legal person. When the governing statute does not clearly resolve the question, a secured party whose debtor is the converting organization may wish to proceed as if the statute provides for both results. In these circumstances, an amendment adding to the initial financing statement the name of the resulting organization may be preferable to an amendment substituting that name for the name of the debtor provided on the initial financing statement. In the event the governing statute is construed as providing that the resulting organization is the same legal person as the converting organization, but with a different name, the timely filing of such an amendment would satisfy the requirement of Section 9-507(c)(2). If, however, the governing statute is construed as providing that the resulting organization is a different legal person, the financing statement (which continues to provide the name of the original debtor) would be effective as to collateral acquired by the resulting organization ("new debtor") before, and within four months after, the conversion. See Section 9-508(b)(1). Inasmuch as it is the first financing statement filed against the resulting organization by the secured party, the record adding the name of the resulting organization as a debtor would constitute "an initial financing statement providing the name of the new debtor" under Section 9-508(b)(2). The secured party also may wish to file another financing statement naming the resulting organization as debtor. See Comment 4.

6. Deletion of All Debtors or Secured Parties of Record. Subsection (e) assures that there will be a debtor and secured party of record for every financing statement.

Example: A filed financing statement names A and B as secured parties of record and covers inventory and equipment. An amendment deletes equipment and purports to delete A and B as secured parties of record without adding a substitute secured party. The amendment is ineffective to the extent it purports to delete the secured parties of record but effective with respect to the deletion of collateral. As a consequence, the financing statement, as amended, covers only inventory, but A and B remain as secured parties of record.

CASE NOTES

Requisite language. - There is no requirement that a termination statement must recite that the secured party "no longer claims a security interest under the financing statement" to be effective. The only requirement is that the termination statement be "to the effect" that the secured party no longer claims a security interest. A check in the termination box on bank's form in conjunction with the printed language of the form disclosed that the filing was a termination statement. That was all that this section required. Crestar Bank v. Neal, 960 F.2d 1242 (4th Cir. 1992).

Notice filing requirement. - In the context of termination, there is no necessity for the type of notice required by former § 8.9-402. The secured creditor can comply with this section by simply providing a statement to the effect that it no longer claims a security interest under the financing statement identified by the number on the termination statement. There is no suggestion in this section or its comments that a prospective creditor must make further inquiry to the secured party of the kind contemplated in former § 8.9-402. Crestar Bank v. Neal, 960 F.2d 1242 (4th Cir. 1992).

Creditor may initiate termination statement filing. - The provisions of subsection (1) of former § 8.9-404 were for the benefit of the debtor. When the conditions for their application were met, the creditor had to file a termination statement. Failure to do so imposed liability for damages under subsection (1) of former § 8.9-404. Nothing in former § 8.9-404, however, prevented the creditor from filing a termination statement on its own volition without awaiting demand. Crestar Bank v. Neal, 960 F.2d 1242 (4th Cir. 1992).

A filing specifically described as a termination statement, for which provision is made in this section, is not the kind of partial release contemplated by former § 8.9-406. Crestar Bank v. Neal, 960 F.2d 1242 (4th Cir. 1992).

A termination statement is a unique filing created by a different code statute, this section, than the one governing financing statements and amendments, former § 8.9-402. Its effect on a secured interest is dramatic and final. Thus, bank's failure to identify the statement as partial release of collateral and instead specifically identifying it as a termination statement cannot be considered a minor error or as not seriously misleading. Crestar Bank v. Neal, 960 F.2d 1242 (4th Cir. 1992).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-404.

2. Duty to File or Send. This section specifies when a secured party must cause the secured party of record to file or send to the debtor a termination statement for a financing statement. Because most financing statements expire in five years unless a continuation statement is filed (section 9-515), no compulsion is placed on the secured party to file a termination statement unless demanded by the debtor, except in the case of consumer goods. Because many consumers will not realize the importance to them of clearing the public record, an affirmative duty is put on the secured party in that case. But many purchase-money security interests in consumer goods will not be filed, except for motor vehicles. See section 9-309(1). Under section 9-311(b), compliance with a certificate of title statute is "equivalent to the filing of a financing statement under this article." Thus, this section applies to a certificate of title unless the section is superseded by a certificate of title statute that contains a specific rule addressing a secured party's duty to cause a notation of a security interest to be removed from a certificate of title. In the context of a certificate of title, however, the secured party could comply with this section by causing the removal itself or providing the debtor with documentation sufficient to enable the debtor to effect the removal.

Subsections (a) and (b) apply to a financing statement covering consumer goods. Subsection (c) applies to other financing statements. Subsections (a) and (c) each makes explicit what was implicit under former article 9: If the debtor did not authorize the filing of a financing statement in the first place, the secured party of record should file or send a termination statement. The liability imposed upon a secured party that fails to comply with subsection (a) or (c) is identical to that imposed for the filing of an unauthorized financing statement or amendment. See section 9-625(e).

3. "Bogus" Filings. A secured party's duty to send a termination statement arises when the secured party "receives" an authenticated demand from the debtor. In the case of an unauthorized financing statement, the person named as debtor in the financing statement may have no relationship with the named secured party and no reason to know the secured party's address. Inasmuch as the address in the financing statement is "held out by (the person named as secured party in the financing statement) as the place for receipt of such communications (i.e., communications relating to security interests)," the putative secured party is deemed to have "received" a notification delivered to that address. See section 1-202(e). If a termination statement is not forthcoming, the person named as debtor itself may authorize the filing of a termination statement, which will be effective if it indicates that the person authorized it to be filed. See sections 9-509(d)(2) and 9-510(c).

4. Buyers of Receivables. Applied literally, former section 9-404(1) would have required many buyers of receivables to file a termination statement immediately upon filing a financing statement because "there is no outstanding secured obligation and no commitment to make advances, incur obligations, or otherwise give value." Subsections (a)(1) and (2) remedy this problem. While the security interest of a buyer of accounts or chattel paper (B-1) is perfected, the debtor is not deemed to retain an interest in the sold receivables and thus could transfer no interest in them to another buyer (B-2) or to a lien creditor (LC). However, for purposes of determining the rights of the debtor's creditors and certain purchasers of accounts or chattel paper from the debtor, while B-1's security interest is unperfected, the debtor-seller is deemed to have rights in the sold receivables, and a competing security interest or judicial lien may attach to those rights. See sections 9-109 and 9-318 and comment 5. Suppose that B-1's security interest in certain accounts and chattel paper is perfected by filing, but the effectiveness of the financing statement lapses. Both before and after lapse, B-1 collects some of the receivables. After lapse, LC acquires a lien on the accounts and chattel paper. B-1's unperfected security interest in the accounts and chattel paper is subordinate to LC's rights. See section 9-317(a)(2). But collections on accounts and chattel paper are not "accounts" or "chattel paper." Even if B-1's security interest in the accounts and chattel paper is or becomes unperfected, neither the debtor nor LC acquires rights to the collections that B-1 collects (and owns) before LC acquires a lien.

5. Effect of Filing. Subsection (b) states the effect of filing a termination statement: The related financing statement ceases to be effective. If one of several secured parties of record files a termination statement, subsection (b) applies only with respect to the rights of the person who authorized the filing of the termination statement. See section 9-510(b). The financing statement remains effective with respect to the rights of the others. However, even if a financing statement is terminated (and thus no longer is effective) with respect to all secured parties of record, the financing statement, including the termination statement, will remain of record until at least one year after it lapses with respect to all secured parties of record. See section 9-519(g).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-405.

2. Assignments. This section provides a permissive device whereby a secured party of record may effectuate an assignment of its power to affect a financing statement. It may also be useful for a secured party who has assigned all or part of its security interest or agricultural lien and wishes to have the fact noted of record, so that inquiries concerning the transaction would be addressed to the assignee. See section 9-502, comment 2. Upon the filing of an assignment, the assignee becomes the "secured party of record" and may authorize the filing of a continuation statement, termination statement, or other amendment. Note that under section 9-310(c) no filing of an assignment is required as a condition of continuing the perfected status of the security interest against creditors and transferees of the original debtor. However, if an assignment is not filed, the assignor remains the secured party of record, with the power (even if not the right) to authorize the filing of effective amendments. See sections 9-509(d) and 9-511(c).

Where a record of a mortgage is effective as a financing statement filed as a fixture filing (section 9-502(c)), then an assignment of record of the security interest may be made only in the manner in which an assignment of record of the mortgage may be made under local real property law.

3. Comparison to Prior Law. Most of the changes reflected in this section are for clarification or to embrace medium-neutral drafting. As a general matter, this section preserves the opportunity given by former section 9-405 to assign a security interest of record in one of two different ways. Under subsection (a), a secured party may assign all of its power to affect a financing statement by naming an assignee in the initial financing statement. The secured party of record may accomplish the same result under subsection (b) by making a subsequent filing. Subsection (b) also may be used for an assignment of only some of the secured party of record's power to affect a financing statement, e.g., the power to affect the financing statement as it relates to particular items of collateral or as it relates to an undivided interest in a security interest in all the collateral. An initial financing statement may not be used to change the secured party of record under these circumstances. However, an amendment adding the assignee as a secured party of record may be used.

CASE NOTES

Lapse of security interest. - Upon the lapse of a security interest that is perfected by filing, the security interest is deemed to be unperfected as against a person who becomes a purchaser before the lapse. Bizmark, Inc. v. Air Prods. Inc., 427 F. Supp. 2d 680, 2006 U.S. Dist. LEXIS 42974 (W.D. Va. 2006).

Lapse of financing statement. - Where a secured party's financing statement lapsed post-petition, the creditor lost his position to all parties with perfected security interests. However, he retained his priority as to the debtor, who could not avoid the secured creditor's security interest under 11 U.S.C.S. § 544(a) because, as of the date of the filing of the petition, the secured creditor's lien was properly perfected. Highland Constr. Mgmt. Servs. v. Wells Fargo, N.A. (In re Highland Constr. Mgmt. Servs.), 497 Bankr. 829, 2013 Bankr. LEXIS 3057 (Bankr. E.D. Va. 2013).

CIRCUIT COURT OPINIONS

Recordation of claim with Virginia State Corporation Commission not required. - Section 55-100 modifies § 43-34.1 by negating the need for filing notice of the claim by the lienor with the Virginia State Corporation Commission, just as compliance with § 55-100 had previously been determined to render the requirements of former § 8.9-403 unnecessary. Gold Key Aviation, L.L.C. v. Int'l Jet Charter, Inc., 56 Va. Cir. 421, 2001 Va. Cir. LEXIS 482 (Norfolk 2001) (decided under former § 8.9-403).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-403(2), (3), and (6).

2. Period of Financing Statement's Effectiveness. Subsection (a) states the general rule: A financing statement is effective for a five-year period unless its effectiveness is continued under this section or terminated under section 9-513. Subsection (b) provides that if the financing statement relates to a public-finance transaction or a manufactured-home transaction and so indicates, the financing statement is effective for 30 years. These financings typically extend well beyond the standard, five-year period. Under subsection (f), a financing statement filed against a transmitting utility remains effective indefinitely, until a termination statement is filed. Likewise, under subsection (g), a mortgage effective as a fixture filing remains effective until its effectiveness terminates under real property law.

3. Lapse. When the period of effectiveness under subsection (a) or (b) expires, the effectiveness of the financing statement lapses. The last sentence of subsection (c) addresses the effect of lapse. The deemed retroactive unperfection applies only with respect to purchasers for value; unlike former section 9-403(2), it does not apply with respect to lien creditors.

Example 1: SP-1 and SP-2 both hold security interests in the same collateral. Both security interests are perfected by filing. SP-1 filed first and has priority under section 9-322(a)(1). The effectiveness of SP-1's filing lapses. As long as SP-2's security interest remains perfected thereafter, SP-2 is entitled to priority over SP-1's security interest, which is deemed never to have been perfected as against a purchaser for value (SP-2). See section 9-322(a)(2).

Example 2: SP holds a security interest perfected by filing. On July 1, LC acquires a judicial lien on the collateral. Two weeks later, the effectiveness of the financing statement lapses. Although the security interest becomes unperfected upon lapse, it was perfected when LC acquired its lien. Accordingly, notwithstanding the lapse, the perfected security interest has priority over the rights of LC, who is not a purchaser. See section 9-317(a)(2).

4. Effect of Debtor's Bankruptcy. Under former section 9-403(2), lapse was tolled if the debtor entered bankruptcy or another insolvency proceeding. Nevertheless, being unaware that insolvency proceedings had been commenced, filing offices routinely removed records from the files as if lapse had not been tolled. Subsection (c) deletes the former tolling provision and thereby imposes a new burden on the secured party: To be sure that a financing statement does not lapse during the debtor's bankruptcy. The secured party can prevent lapse by filing a continuation statement, even without first obtaining relief from the automatic stay. See Bankruptcy Code section 362(b)(3). Of course, if the debtor enters bankruptcy before lapse, the provisions of this article with respect to lapse would be of no effect to the extent that federal bankruptcy law dictates a contrary result (e.g., to the extent that the Bankruptcy Code determines rights as of the date of the filing of the bankruptcy petition).

5. Continuation Statements. Subsection (d) explains when a continuation statement may be filed. A continuation statement filed at a time other than that prescribed by subsection (d) is ineffective, see section 9-510(c), and the filing office may not accept it. See sections 9-516(b) and 9-520(a). Subsection (e) specifies the effect of a continuation statement and provides for successive continuation statements.

CASE NOTES

Former § 8.9-403 was inapplicable to recordation of instruments affecting civil aircraft of the United States as defined by federal law (see 49 U.S.C. § 40102). Blair v. Crestar Bank, 188 F.3d 576 (4th Cir. 1999) (decided under prior law).

CIRCUIT COURT OPINIONS

Recordation of claim with Virginia State Corporation Commission not required. - Section 55-100 modifies § 43-34.1 by negating the need for filing notice of the claim by the lienor with the Virginia State Corporation Commission, just as compliance with § 55-100 had previously been determined to render the requirements of former § 8.9-403 unnecessary. Gold Key Aviation, L.L.C. v. Int'l Jet Charter, Inc., 56 Va. Cir. 421, 2001 Va. Cir. LEXIS 482 (Norfolk 2001) (decided under former § 8.9-403).

OFFICIAL COMMENT

Comment. - 1. Source. Subsection (a): Former section 9-403(1); the remainder is new.

2. What Constitutes Filing. Subsection (a) deals generically with what constitutes filing of a record, including an initial financing statement and amendments of all kinds (e.g., assignments, termination statements, and continuation statements). It follows former section 9-403(1), under which either acceptance of a record by the filing office or presentation of the record and tender of the filing fee constitutes filing.

3. Effectiveness of Rejected Record. Subsection (b) provides an exclusive list of grounds upon which the filing office may reject a record. See section 9-520(a). Although some of these grounds would also be grounds for rendering a filed record ineffective (e.g., an initial financing statement does not provide a name for the debtor), many others would not be (e.g., an initial financing statement does not provide a mailing address for the debtor or secured party of record). Neither this section nor section 9-520 requires or authorizes the filing office to determine, or even consider, the accuracy of information provided in a record.

A financing statement or other record that is communicated to the filing office but which the filing office refuses to accept provides no public notice, regardless of the reason for the rejection. However, this section distinguishes between records that the filing office rightfully rejects and those that it wrongfully rejects. A filer is able to prevent a rightful rejection by complying with the requirements of subsection (b). No purpose is served by giving effect to records that justifiably never find their way into the system, and subsection (b) so provides.

Subsection (d) deals with the filing office's unjustified refusal to accept a record. Here, the filer is in no position to prevent the rejection and as a general matter should not be prejudiced by it. Although wrongfully rejected records generally are effective, subsection (d) contains a special rule to protect a third-party purchaser of the collateral (e.g., a buyer or competing secured party) who gives value in reliance upon the apparent absence of the record from the files. As against a person who searches the public record and reasonably relies on what the public record shows, subsection (d) imposes upon the filer the risk that a record failed to make its way into the filing system because of the filing office's wrongful rejection of it. (Compare section 9-517, under which a mis-indexed financing statement is fully effective.) This risk is likely to be small, particularly when a record is presented electronically, and the filer can guard against this risk by conducting a post-filing search of the records. Moreover, section 9-520(b) requires the filing office to give prompt notice of its refusal to accept a record for filing.

4. Method or Medium of Communication. Rejection pursuant to subsection (b)(1) for failure to communicate a record properly should be understood to mean noncompliance with procedures relating to security, authentication, or other communication-related requirements that the filing office may impose. Subsection (b)(1) does not authorize a filing office to impose additional substantive requirements. See section 9-520, comment 2.

5. Address for Secured Party of Record. Under subsection (b)(4) and section 9-520(a), the lack of a mailing address for the secured party of record requires the filing office to reject an initial financing statement. The failure to include an address for the secured party of record no longer renders a financing statement ineffective. See section 9-502(a). The function of the address is not to identify the secured party of record but rather to provide an address to which others can send required notifications, e.g., of a purchase-money security interest in inventory or of the disposition of collateral. Inasmuch as the address shown on a filed financing statement is an "address that is reasonable under the circumstances," a person required to send a notification to the secured party may satisfy the requirement by sending a notification to that address, even if the address is or becomes incorrect. See section 9-102 (definition of "send"). Similarly, because the address is "held out by (the secured party) as the place for receipt of such communications (i.e., communications relating to security interests)," the secured party is deemed to have received a notification delivered to that address. See section 1-202(e).

6. Uncertainty Concerning Individual Debtor's Surname. Subsection (b)(3)(C) requires the filing office to reject an initial financing statement or amendment adding an individual debtor if the office cannot index the record because it does not identify the debtor's surname (e.g., it is unclear whether the debtor's surname is Elton or John).

7. Inability of Filing Office to Read or Decipher Information. Under subsection (c)(1), if the filing office cannot read or decipher information, the information is not provided by a record for purposes of subsection (b).

8. Classification of Records. For purposes of subsection (b), a record that does not indicate it is an amendment or identify an initial financing statement to which it relates is deemed to be an initial financing statement. See subsection (c)(2).

9. Effectiveness of Rejectable But Unrejected Record. Section 9-520(a) requires the filing office to refuse to accept an initial financing statement for a reason set forth in subsection (b). However, if the filing office accepts such a financing statement nevertheless, the financing statement generally is effective if it complies with the requirements of section 9-502(a) and (b). See section 9-520(c). Similarly, an otherwise effective financing statement generally remains so even though the information in the financing statement becomes incorrect. See section 9-507(b). (Note that if the information required by subsection (b)(5) is incorrect when the financing statement is filed, section 9-338 applies.)

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Effectiveness of Mis-Indexed Records. This section provides that the filing office's error in mis-indexing a record does not render ineffective an otherwise effective record. As did former section 9-401, this section imposes the risk of filing-office error on those who search the files rather than on those who file.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Information Statements. Former article 9 did not afford a nonjudicial means for a debtor to indicate that a financing statement or other record was inaccurate or wrongfully filed. Subsection (a) affords the debtor the right to file an information statement. Among other requirements, the information statement must provide the basis for the debtor's belief that the public record should be corrected. See subsection (b). These provisions, which resemble the analogous remedy in the Fair Credit Reporting Act, 15 U.S.C. section 1681i, afford an aggrieved person the opportunity to state its position on the public record. They do not permit an aggrieved person to change the legal effect of the public record. Thus, although a filed information statement becomes part of the "financing statement," as defined in section 9-102, the filing does not affect the effectiveness of the initial financing statement or any other filed record. See subsection (e).

Sometimes a person files a termination statement or other record relating to a filed financing statement without being entitled to do so. A secured party of record with respect to the financing statement who believes that such a record has been filed may, but need not, file an information statement indicating that the person that filed the record was not entitled to do so. See subsection (c). An information statement has no legal effect. Its sole purpose is to provide some limited public notice that the efficacy of a filed record is disputed. If the person that filed the record was not entitled to do so, the filed record is ineffective, regardless of whether the secured party of record files an information statement. Likewise, if the person that filed the record was entitled to do so, the filed record is effective, even if the secured party of record files an information statement. See Section 9-510(a), 9-518(e). Because an information statement filed under subsection (c) has no legal effect, a secured party of record - even one who is aware of the unauthorized filing of a record - has no duty to file one. Just as searchers bear the burden of determining whether the filing of initial financing statement was authorized, searchers bear the burden of determining whether the filing of every subsequent record was authorized.

Inasmuch as the filing of an information statement has no legal effect, this section does not provide a mechanism by which a secured party can correct an error that it discovers in its own financing statement.

This section does not displace other provisions of this article that impose liability for making unauthorized filings or failing to file or send a termination statement (see section 9-625(e)), nor does it displace any available judicial remedies.

3. Resort to Other Law. This article cannot provide a satisfactory or complete solution to problems caused by misuse of the public records. The problem of "bogus" filings is not limited to the UCC filing system but extends to the real property records, as well. A summary judicial procedure for correcting the public record and criminal penalties for those who misuse the filing and recording systems are likely to be more effective and put less strain on the filing system than provisions authorizing or requiring action by filing and recording offices.

SubPart 2. Duties and Operation of Filing Office.

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 9-403(4) and (7), and section 9-405(2).

2. Filing Office's Duties. Subsections (a) through (e) set forth the duties of the filing office with respect to filed records. Subsection (h), which is new, imposes a minimum standard of performance for those duties. Prompt indexing is crucial to the effectiveness of any filing system. An accepted but unindexed record affords no public notice. Subsection (f) requires the filing office to maintain appropriate storage and retrieval facilities, and subsection (g) contains minimum requirements for the retention of records.

3. File Number. Subsection (a)(1) requires the filing office to assign a unique number to each filed record. That number is the "file number" only if the record is an initial financing statement. See section 9-102.

4. Time of Filing. Subsection (a)(2) and section 9-523 refer to the "date and time" of filing. The statutory text does not contain any instructions to a filing office as to how the time of filing is to be determined. The method of determining or assigning a time of filing is an appropriate matter for filing-office rules to address.

5. Related Records. Subsections (c) and (f) are designed to ensure that an initial financing statement and all filed records relating to it are associated with one another, indexed under the name of the debtor, and retrieved together. To comply with subsection (f), a filing office (other than a real property recording office in a state that enacts subsection (f), Alternative B) must be capable of retrieving records in each of two ways: By the name of the debtor and by the file number of the initial financing statement to which the record relates.

6. Prohibition on Deleting Names from Index. This article contemplates that the filing office will not delete the name of a debtor from the index until at least one year passes after the effectiveness of the financing statement lapses as to all secured parties of record. See subsection (g). This rule applies even if the filing office accepts an amendment purporting to delete or modify the name of a debtor or terminate the effectiveness of the financing statement. If an amendment provides a modified name for a debtor, the amended name should be added to the index, see subsection (c)(2), but the preamendment name should remain in the index.

Compared to former article 9, the rule in subsection (g) increases the amount of information available to those who search the public records. The rule also contemplates that searchers - not the filing office - will determine the significance and effectiveness of filed records.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Refusal to Accept Record for Filing. In some states, filing offices considered themselves obligated by former article 9 to review the form and content of a financing statement and to refuse to accept those that they determine are legally insufficient. Some filing offices imposed requirements for or conditions to filing that do not appear in the statute. Under this section, the filing office is not expected to make legal judgments and is not permitted to impose additional conditions or requirements.

Subsection (a) both prescribes and limits the bases upon which the filing office must and may reject records by reference to the reasons set forth in section 9-516(b). For the most part, the bases for rejection are limited to those that prevent the filing office from dealing with a record that it receives - because some of the requisite information (e.g., the debtor's name) is missing or cannot be deciphered, because the record is not communicated by a method (e.g., it is MIME-rather than UU-encoded) or medium (e.g., it is written rather than electronic) that the filing office accepts, or because the filer fails to tender an amount equal to or greater than the filing fee.

3. Consequences of Accepting Rejectable Record. Section 9-516(b) includes among the reasons for rejecting an initial financing statement the failure to give certain information that is not required as a condition of effectiveness. In conjunction with section 9-516(b)(5), this section requires the filing office to refuse to accept a financing statement that is legally sufficient to perfect a security interest under section 9-502 but does not contain a mailing address for the debtor or disclose whether the debtor is an individual or an organization. The information required by section 9-516(b)(5) assists searchers in weeding out "false positives," i.e., records that a search reveals but which do not pertain to the debtor in question. It assists filers by helping to ensure that the debtor's name is correct and that the financing statement is filed in the proper jurisdiction.

If the filing office accepts a financing statement that does not give this information at all, the filing is fully effective. Section 9-520(c). The financing statement also generally is effective if the information is given but is incorrect; however, section 9-338 affords protection to buyers and holders of perfected security interests who gives value in reasonable reliance upon the incorrect information.

4. Filing Office's Duties with Respect to Rejected Record. Subsection (b) requires the filing office to communicate the fact of rejection and the reason therefor within a fixed period of time. Inasmuch as a rightfully rejected record is ineffective and a wrongfully rejected record is not fully effective, prompt communication concerning any rejection is important.

5. Partial Effectiveness of Record. Under subsection (d), the provisions of this part apply to each debtor separately. Thus, a filing office may reject an initial financing statement or other record as to one named debtor but accept it as to the other.

Example: An initial financing statement is communicated to the filing office. The financing statement names two debtors, John Smith and Jane Smith. It contains all of the information described in section 9-516(b)(5) with respect to John but lacks some of the information with respect to Jane. The filing office must accept the financing statement with respect to John, reject it with respect to Jane, and notify the filer of the rejection.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-403(3), revised substantially.

2. Maintenance of Records. Section 9-523 requires the filing office to provide information concerning certain lapsed financing statements. Accordingly, subsection (a) requires the filing office to maintain a record of the information in a financing statement for at least one year after lapse. During that time, the filing office may not delete any information with respect to a filed financing statement; it may only add information. This approach relieves the filing office from any duty to determine whether to substitute or delete information upon receipt of an amendment. It also assures searchers that they will receive all information with respect to financing statements filed against a debtor and thereby be able themselves to determine the state of the public record.

The filing office may maintain this information in any medium. Subsection (b) permits the filing office immediately to destroy written records evidencing a financing statement, provided that the filing office maintains another record of the information contained in the financing statement as required by subsection (a).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-407; subsections (d) and (e) are new.

2. Filing Office's Duty to Provide Information. Former section 9-407, dealing with obtaining information from the filing office, was bracketed to suggest to legislatures that its enactment was optional. Experience has shown that the method by which interested persons can obtain information concerning the public records should be uniform. Accordingly, the analogous provisions of this article are not in brackets.

Most of the other changes from former section 9-407 are for clarification, to embrace medium-neutral drafting, or to impose standards of performance on the filing office.

3. Acknowledgments of Filing. Subsections (a) and (b) require the filing office to acknowledge the filing of a record. Under subsection (a), the filing office is required to acknowledge the filing of a written record only upon request of the filer. Subsection (b) requires the filing office to acknowledge the filing of a non-written record even in the absence of a request from the filer.

4. Response to Search Request. Subsection (c)(3) requires the filing office to provide "the information contained in each financing statement" to a person who requests it. This requirement can be satisfied by providing copies, images, or reports. The requirement does not in any manner inhibit the filing office from also offering to provide less than all of the information (presumably for a lower fee) to a person who asks for less. Thus, subsection (c) accommodates the practice of providing only the type of record (e.g., initial financing statement, continuation statement), number assigned to the record, date and time of filing, and names and addresses of the debtor and secured party when a requesting person asks for no more (i.e., when the person does not ask for copies of financing statements). In contrast, the filing office's obligation under subsection (b) to provide an acknowledgment containing "the information contained in the record" is not defined by a customer's request. Thus unless the filer stipulates otherwise, to comply with subsection (b) the filing office's acknowledgment must contain all of the information in a record.

Subsection (c) assures that a minimum amount of information about filed records will be available to the public. It does not preclude a filing office from offering additional services.

5. Lapsed and Terminated Financing Statements. This section reflects the policy that terminated financing statements will remain part of the filing office's data base. The filing office may remove from the data base only lapsed financing statements, and then only when at least a year has passed after lapse. See section 9-519(g). Subsection (c)(1)(C) requires a filing office to conduct a search and report as to lapsed financing statements that have not been removed from the data base, when requested.

6. Search by Debtor's Address. Subsection (c)(1)(A) contemplates that, by making a single request, a searcher will receive the results of a search of the entire public record maintained by any given filing office. Addition of the bracketed language in subsection (c)(1)(A) would permit a search report limited to financing statements showing a particular address for the debtor, but only if the search request is so limited. With or without the bracketed language, this subsection does not permit the filing office to compel a searcher to limit a request by address.

7. Medium of Communication; Certificates. Former article 9 provided that the filing office respond to a request for information by providing a certificate. The principle of medium-neutrality would suggest that the statute not require a written certificate. Subsection (d) follows this principle by permitting the filing office to respond by communicating "in any medium." By permitting communication "in any medium," subsection (d) is not inconsistent with a system in which persons other than filing office staff conduct searches of the filing office's (computer) records.

Some searchers find it necessary to introduce the results of their search into evidence. Because official written certificates might be introduced into evidence more easily than official communications in another medium, subsection (d) affords states the option of requiring the filing office to issue written certificates upon request. The alternative bracketed language in subsection (d) recognizes that some states may prefer to permit the filing office to respond in another medium, as long as the response can be admitted into evidence in the courts of that state without extrinsic evidence of its authenticity.

8. Performance Standard. The utility of the filing system depends on the ability of searchers to get current information quickly. Accordingly, subsection (e) requires that the filing office respond to a request for information no later than two business days after it receives the request. The information contained in the response must be current as of a date no earlier than three business days before the filing office receives the request. See subsection (c)(1). The failure of the filing office to comply with performance standards, such as subsection (e), has no effect on the private rights of persons affected by the filing of records.

9. Sales of Records in Bulk. Subsection (f), which is new, mandates that the appropriate official or the filing office sell or license the filing records to the public in bulk, on a nonexclusive basis, in every medium available to the filing office. The details of implementation are left to filing-office rules.

OFFICIAL COMMENT

Comment. - Source. New; derived from section 4-109.

OFFICIAL COMMENT

Comment. - 1. Source. Various sections of former part 4.

2. Fees. This section contains all fee requirements for filing, indexing, and responding to requests for information. Uniformity in the fee structure (but not necessarily in the amount of fees) makes this article easier for secured parties to use and reduces the likelihood that a filed record will be rejected for failure to pay at least the correct amount of the fee. See section 9-516(b)(2).

The costs of processing electronic records are less than those with respect to written records. Accordingly, this section mandates a lower fee as an incentive to file electronically and imposes the additional charge (if any) for multiple debtors only with respect to written records. When written records are used, this article encourages the use of the uniform forms in section 9-521. The fee for filing these forms should be no greater than the fee for other written records.

To make the relevant information included in a filed record more accessible once the record is found, this section mandates a higher fee for longer written records than for shorter ones. Finally, recognizing that financing statements naming more than one debtor are most often filed against a husband and wife, any additional charge for multiple debtors applies to records filed with respect to more than two debtors, rather than with respect to more than one.

OFFICIAL COMMENT

Comment. - 1. Source. New; subsection (b) derives in part from the Uniform Consumer Credit Code (1974).

2. Rules Required. Operating a filing office is a complicated business, requiring many more rules and procedures than this article can usefully provide. Subsection (a) requires the adoption of rules to carry out the provisions of article 9. The filing office rules must be consistent with the provisions of the statute and adopted in accordance with local procedures. The publication requirement informs secured parties about filing office practices, aids secured parties in evaluating filing-related risks and costs, and promotes regularity of application within the filing office.

3. Importance of Uniformity. In today's national economy, uniformity of the policies and practices of the filing offices will reduce the costs of secured transactions substantially. The International Association of Corporate Administrators (IACA), referred to in subsection (b), is an organization whose membership includes filing officers from every state. These individuals are responsible for the proper functioning of the article 9 filing system and have worked diligently to develop model filing office rules, with a view toward efficiency and uniformity.

Although uniformity is an important desideratum, subsection (a) affords considerable flexibility in the adoption of filing office rules. Each state may adopt a version of subsection (a) that reflects the desired relationship between the statewide filing office described in section 9-501(a)(2) and the local filing offices described in section 9-501(a)(1) and that takes into account the practices of its filing offices. Subsection (a) need not designate a single official or agency to adopt rules applicable to all filing offices, and the rules applicable to the statewide filing office need not be identical to those applicable to the local filing office. For example, subsection (a) might provide for the statewide filing office to adopt filing office rules, and, if not prohibited by other law, the filing office might adopt one set of rules for itself and another for local offices. Or, subsection (a) might designate one official or agency to adopt rules for the statewide filing office and another to adopt rules for local filing offices.

OFFICIAL COMMENT

Comment. - 1. Source. New; derived in part from the Uniform Consumer Credit Code (1974).

2. Duty to Report. This section is designed to promote compliance with the standards of performance imposed upon the filing office and with the requirement that the filing office's policies, practices, and technology be consistent and compatible with the policies, practices, and technology of other filing offices.

CASE NOTES

Secured creditor may not enforce his interest in collateral until such time as the debtor defaults. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

Secured party's options. - When a debtor is in default under a security agreement, a secured party has the option to foreclose, to reduce the claim to judgment, or to "otherwise enforce the security interest by any available judicial procedure." Charles E. Brauer Co. v. NationsBank, 251 Va. 28 , 466 S.E.2d 382 (1996).

The guarantor, prior to default, may waive the rights which former § 8.9-504 (3) expressly conferred on debtors. Chrysler Credit Corp. v. Curley, 753 F. Supp. 611 (E.D. Va. 1990).

Notice of interval of third party in deposit account. - If a bank may be charged with notice of the interest of a third party in a deposit account, it may not apply the account to satisfy a debt owed by the depositor. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

No duty to subordinate interests to enforce remedies. - The priority of a perfected security interest is not affected by the fact that a secured party, in order to assist the debtor and to enhance the likelihood of satisfaction of any indebtedness, agreed not to declare the debtor in default, since a secured creditor does not owe any duty to those holding subordinate interests to proceed to enforce his remedies. National Acceptance Co. of Am. v. Virginia Capital Bank, 491 F. Supp. 1269 (E.D. Va. 1980).

Federal court may hold deficiency judgment barred for noncompliance with Code. - In the absence of a definitive ruling by the Supreme Court of Virginia, a federal court may conclude that a secured creditor was barred from recovering a deficiency judgment because it disposed of the collateral in a manner not permitted by the Uniform Commercial Code. In re Bishop, 482 F.2d 381 (4th Cir. 1973).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-501(1), (2), (5).

2. Enforcement: In General. The rights of a secured party to enforce its security interest in collateral after the debtor's default are an important feature of a secured transaction. (Note that the term "rights," as defined in section 1-201 , includes "remedies.") This part provides those rights as well as certain limitations on their exercise for the protection of the defaulting debtor, other creditors, and other affected persons. However, subsections (a) and (d) make clear that the rights provided in this part do not exclude other rights provided by agreement.

3. When Remedies Arise. Under subsection (a) the secured party's rights arise "(a)fter default." As did former section 9-501, this article leaves to the agreement of the parties the circumstances giving rise to a default. This article does not determine whether a secured party's post-default conduct can constitute a waiver of default in the face of an agreement stating that such conduct shall not constitute a waiver. Rather, it continues to leave to the parties' agreement, as supplemented by law other than this article, the determination whether a default has occurred or has been waived. See section 1-103.

4. Possession of Collateral; Section 9-207. After a secured party takes possession of collateral following a default, there is no longer any distinction between a security interest that before default was nonpossessory and a security interest that was possessory before default, as under a common-law pledge. This part generally does not distinguish between the rights of a secured party with a nonpossessory security interest and those of a secured party with a possessory security interest. However, section 9-207 addresses rights and duties with respect to collateral in a secured party's possession. Under subsection (b) of this section, section 9-207 applies not only to possession before default but also to possession after default. Subsection (b) also has been conformed to section 9-207, which, unlike former section 9-207, applies to secured parties having control of collateral.

5. Cumulative Remedies. Former section 9-501(1) provided that the secured party's remedies were cumulative, but it did not explicitly provide whether the remedies could be exercised simultaneously. Subsection (c) permits the simultaneous exercise of remedies if the secured party acts in good faith. The liability scheme of subpart 2 affords redress to an aggrieved debtor or obligor. Moreover, permitting the simultaneous exercise of remedies under subsection (c) does not override any non-UCC law, including the law of tort and statutes regulating collection of debts, under which the simultaneous exercise of remedies in a particular case constitutes abusive behavior or harassment giving rise to liability.

6. Judicial Enforcement. Under subsection (a) a secured party may reduce its claim to judgment or foreclose its interest by any available procedure outside this article under applicable law. Subsection (e) generally follows former section 9-501(5). It makes clear that any judicial lien that the secured party may acquire against the collateral effectively is a continuation of the original security interest (if perfected) and not the acquisition of a new interest or a transfer of property on account of a preexisting obligation. Under former section 9-501(5), the judicial lien was stated to relate back to the date of perfection of the security interest. Subsection (e), however, provides that the lien relates back to the earlier of the date of filing or the date of perfection. This provides a secured party who enforces a security interest by judicial process with the benefit of the "first-to-file-or-perfect" priority rule of section 9-322(a)(1).

7. Agricultural Liens. Part 6 provides parallel treatment for the enforcement of agricultural liens and security interests. Because agricultural liens are statutory rather than consensual, this article does draw a few distinctions between these liens and security interests. Under subsection (e), the statute creating an agricultural lien would govern whether and the date to which an execution lien relates back. Section 9-606 explains when a "default" occurs in the agricultural lien context.

8. Execution Sales. Subsection (f) also follows former section 9-501(5). It makes clear that an execution sale is an appropriate method of foreclosure contemplated by this part. However, the sale is governed by other law and not by this article, and the limitations under section 9-610 on the right of a secured party to purchase collateral do not apply.

9. Sales of Receivables; Consignments. Subsection (g) provides that, except as provided in section 9-607(c), the duties imposed on secured parties do not apply to buyers of accounts, chattel paper, payment intangibles, or promissory notes. Although denominated "secured parties," these buyers own the entire interest in the property sold and so may enforce their rights without regard to the seller ("debtor") or the seller's creditors. Likewise, a true consignor may enforce its ownership interest under other law without regard to the duties that this part imposes on secured parties. Note, however, that section 9-615 governs cases in which a consignee's secured party (other than a consignor) is enforcing a security interest that is senior to the security interest (i.e., ownership interest) of a true consignor.

CASE NOTES

In the absence of explicit statutory direction, guarantors should not be prohibited from waiving the right to notice or the right to object to the commercial reasonableness of the collateral disposition. Chrysler Credit Corp. v. Curley, 753 F. Supp. 611 (E.D. Va. 1990) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-501(3).

2. Waiver: In General. Section 1-102(3) addresses which provisions of the UCC are mandatory and which may be varied by agreement. With exceptions relating to good faith, diligence, reasonableness, and care, immediate parties, as between themselves, may vary its provisions by agreement. However, in the context of rights and duties after default, our legal system traditionally has looked with suspicion on agreements that limit the debtor's rights and free the secured party of its duties. As stated in former section 9-501, comment 4, "no mortgage clause has ever been allowed to clog the equity of redemption." The context of default offers great opportunity for overreaching. The suspicious attitudes of the courts have been grounded in common sense. This section, like former section 9-501(3), codifies this long-standing and deeply rooted attitude. The specified rights of the debtor and duties of the secured party may not be waived or varied except as stated. Provisions that are not specified in this section are subject to the general rules in section 1-102(3).

3. Nonwaivable Rights and Duties. This section revises former section 9-501(3) by restricting the ability to waive or modify additional specified rights and duties: (i) Duties under section 9-207(b)(4)(C), which deals with the use and operation of consumer goods; (ii) the right to a response to a request for an accounting, concerning a list of collateral, or concerning a statement of account (section 9-210); (iii) the duty to collect collateral in a commercially reasonable manner (section 9-607); (iv) the implicit duty to refrain from a breach of the peace in taking possession of collateral under section 9-609; (v) the duty to apply noncash proceeds of collection or disposition in a commercially reasonable manner (sections 9-608 and 9-615); (vi) the right to a special method of calculating a surplus or deficiency in certain dispositions to a secured party, a person related to secured party, or a secondary obligor (section 9-615); (vii) the duty to give an explanation of the calculation of a surplus or deficiency (section 9-616); (viii) the right to limitations on the effectiveness of certain waivers (section 9-624); and (ix) the right to hold a secured party liable for failure to comply with this article (sections 9-625 and 9-626). For clarity and consistency, this article uses the term "waive or vary" instead of "renounc[e] or modify[])" which appeared in former section 9-504(3).

This section provides generally that the specified rights and duties "may not be waived or varied." However, it does not restrict the ability of parties to agree to settle, compromise, or renounce claims for past conduct that may have constituted a violation or breach of those rights and duties, even if the settlement involves an express "waiver."

Section 9-610(c) limits the circumstances under which a secured party may purchase at its own private disposition. Transactions of this kind are equivalent to "strict foreclosures" and are governed by Sections 9-620, 9-621, and 9-622. The provisions of these sections can be waived only to the extent provided in Section 9-624(b). See Section 9-602.

4. Waiver by Debtors and Obligors. The restrictions on waiver contained in this section apply to obligors as well as debtors. This resolves a question under former article 9 as to whether secondary obligors, assuming that they were "debtors" for purposes of former part 5, were permitted to waive, under the law of suretyship, rights and duties under that part.

5. Certain Post-Default Waivers. Section 9-624 permits post-default waivers in limited circumstances. These waivers must be made in agreements that are authenticated. Under section 1-201 , an " 'agreement' means the bargain of the parties in fact." In considering waivers under section 9-624 and analogous agreements in other contexts, courts should carefully scrutinize putative agreements that appear in records that also address many additional or unrelated matters.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-501(3).

2. Limitation on Ability to Set Standards. Subsection (a), like former section 9-501(3), permits the parties to set standards for compliance with the rights and duties under this part if the standards are not "manifestly unreasonable." Under subsection (b), the parties are not permitted to set standards measuring fulfillment of the secured party's duty to take collateral without breaching the peace.

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 9-313(8) and 9-501(4).

2. Real-Property-Related Collateral. The collateral in many transactions consists of both real and personal property. In the interest of simplicity, speed, and economy, subsection (a), like former section 9-501(4), permits (but does not require) the secured party to proceed as to both real and personal property in accordance with its rights and remedies with respect to the real property. Subsection (a) also makes clear that a secured party who exercises rights under part 6 with respect to personal property does not prejudice any rights under real-property law.

This article does not address certain other real-property-related problems. In a number of states, the exercise of remedies by a creditor who is secured by both real property and non-real property collateral is governed by special legal rules. For example, under some antideficiency laws, creditors risk loss of rights against personal property collateral if they err in enforcing their rights against the real property. Under a "one-form-of-action" rule (or rule against splitting a cause of action), a creditor who judicially enforces a real property mortgage and does not proceed in the same action to enforce a security interest in personalty may (among other consequences) lose the right to proceed against the personalty. Although statutes of this kind create impediments to enforcement of security interests, this article does not override these limitations under other law.

3. Fixtures. Subsection (b) is new. It makes clear that a security interest in fixtures may be enforced either under real property law or under any of the applicable provisions of part 6, including sale or other disposition either before or after removal of the fixtures (see subsection (c)). Subsection (b) also serves to overrule cases holding that a secured party's only remedy after default is the removal of the fixtures from the real property. See, e.g., Maplewood Bank & Trust v. Sears, Roebuck & Co., 625 A.2d 537 (N.J. Super. Ct. App. Div. 1993).

Subsection (c) generally follows former section 9-313(8). It gives the secured party the right to remove fixtures under certain circumstances. A secured party whose security interest in fixtures has priority over owners and encumbrancers of the real property may remove the collateral from the real property. However, subsection (d) requires the secured party to reimburse any owner (other than the debtor) or encumbrancer for the cost of repairing any physical injury caused by the removal. This right to reimbursement is implemented by the last sentence of subsection (d), which gives the owner or encumbrancer a right to security or indemnity as a condition for giving permission to remove.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Duties to Unknown Persons. This section relieves a secured party from duties owed to a debtor or obligor, if the secured party does not know about the debtor or obligor. Similarly, it relieves a secured party from duties owed to a secured party or lienholder who has filed a financing statement against the debtor, if the secured party does not know about the debtor. For example, a secured party may be unaware that the original debtor has sold the collateral subject to the security interest and that the new owner has become the debtor. If so, the secured party owes no duty to the new owner (debtor) or to a secured party who has filed a financing statement against the new owner. This section should be read in conjunction with the exculpatory provisions in section 9-628. Note that it relieves a secured party not only from duties arising under this article but also from duties arising under other law by virtue of the secured party's status as such under this article, unless the other law otherwise provides.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Time of Default. Remedies under this part become available upon the debtor's "default." See section 9-601. This section explains when "default" occurs in the agricultural-lien context. It requires one to consult the enabling statute to determine when the lienholder is entitled to enforce the lien.

CASE NOTES

Relation to federal bankruptcy law. - Order confirming debtor's Chapter 13 bankruptcy plan was vacated and remanded because the hanging paragraph in 11 U.S.C.S. § 1325(a) did not operate to deprive undersecured "910 creditors" of their deficiency claims, as the parties were bound to their contractual rights and obligations under operative state law; given the explicit language in the parties' contract, there was no dispute that the contract provided the creditor with a right to pursue a deficiency claim, and such contract was enforceable under §§ 8.9A-607 through 8.9A-626 . Tidewater Fin. Co. v. Kenney, 531 F.3d 312, 2008 U.S. App. LEXIS 13377 (4th Cir. 2008).

Debt collection. - Chapter 11 debtor, a company that manufactured and sold windows, doors, trim, and millwork, alleged facts that were sufficient to overcome a bank national association's motion to dismiss the debtor's claims that the association committed breach of contract when it accelerated a loan, and interfered with the debtor's business when it wrongfully injected itself into negotiations the debtor had with one of two third parties that expressed an interest in purchasing the debtor. However, the debtor was not entitled to relief on its claims that the association breached its duty of good faith under § 8.1A-304, and acted in a commercially unreasonable manner in violation of § 8.9A-607 , when it attempted to collect debts the debtor owed, including its decision to notify the debtor's creditors that they should make payments to the bank. Barber & Ross Co. v. Wachovia Bank Nat'l Ass'n (In re Barber & Ross Co.),, 2010 Bankr. LEXIS 6293 (Bankr. W.D. Va. Apr. 5, 2010).

Permanent injunction. - Court to convert its preliminary order into a permanent injunction barring defendants from interfering with plaintiff's enforcement of a security agreement because the parties had already had a full and fair opportunity to litigate the merits of plaintiff's proposed injunction, and the court had already entered a preliminary injunction on the very same issue, finding that such an injunction was necessary to protect the interests of innocent third parties (the public interest factors that motivated the court to enter its preliminary injunction had not changed, and the court therefore found that ongoing injunctive relief remained appropriate in favor of plaintiff). Auto. Fin. Corp. v. EEE Auto Sales, Inc.,, 2011 U.S. Dist. LEXIS 70118 (E.D. Va. June 28, 2011).

CIRCUIT COURT OPINIONS

Failure to show reasonableness of repossession fee. - While plaintiff, as a secured party, was entitled to take possession of collateral on default of the defendants and was further entitled to charge defendants the reasonable expenses of collection of the collateral, plaintiff had to show that the fees and expenses charged were reasonable. Unless plaintiff showed otherwise, the fees and expenses charged were presumed unreasonable and in violation of the statutory requirements. Nat'l Auto Sales v. Butler, 58 Va. Cir. 185, 2002 Va. Cir. LEXIS 140 (Richmond 2002) (decided under former § 8.9-502).

Successor liability. - Contract between a retail company the borrower had acquired and the account debtor did not create a legal obligation for the account debtor to pay the borrower where the asset purchase agreement and the bankruptcy court order approving the sale clearly indicated that the borrower was not liable for payment on the contract under any theory of successor liability. FVCBank v. Transform Holdco LLC,, 2021 Va. Cir. LEXIS 84 (Fairfax County Apr. 16, 2021).

Debt collection. - Account debtor was under no legal obligation to pay the secured lender where although the lender had a security interest in the borrower's accounts receivable, the borrower and the account debtor had no contract that obligated payment, and the contracts between the borrower and the account debtor's subsidiaries did not create a legal obligation for the account debtor to pay the borrower. FVCBank v. Transform Holdco LLC,, 2021 Va. Cir. LEXIS 84 (Fairfax County Apr. 16, 2021).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-502; subsections (b), (d), and (e) are new.

2. Collections: In General. Collateral consisting of rights to payment is not only the most liquid asset of a typical debtor's business but also is property that may be collected without any interruption of the debtor's business. This situation is far different from that in which collateral is inventory or equipment, whose removal may bring the business to a halt. Furthermore, problems of valuation and identification, present with collateral that is tangible personal property, frequently are not as serious in the case of rights to payment and other intangible collateral. Consequently, this section, like former section 9-502, recognizes that financing through assignments of intangibles lacks many of the complexities that arise after default in other types of financing. This section allows the assignee to liquidate collateral by collecting whatever may become due on the collateral, whether or not the method of collection contemplated by the security arrangement before default was direct (i.e., payment by the account debtor to the assignee, "notification" financing) or indirect (i.e., payment by the account debtor to the assignor, "nonnotification" financing).

3. Scope. The scope of this section is broader than that of former section 9-502. It applies not only to collections from account debtors and obligors on instruments but also to enforcement more generally against all persons obligated on collateral. It explicitly provides for the secured party's enforcement of the debtor's rights in respect of the account debtor's (and other third parties') obligations and for the secured party's enforcement of supporting obligations with respect to those obligations. (Supporting obligations are components of the collateral under section 9-203(f).) The rights of a secured party under subsection (a) include the right to enforce claims that the debtor may enjoy against others. For example, the claims might include a breach-of-warranty claim arising out of a defect in equipment that is collateral or a secured party's action for an injunction against infringement of a patent that is collateral. Those claims typically would be proceeds of original collateral under section 9-315.

4. Collection and Enforcement Before Default. Like part 6 generally, this section deals with the rights and duties of secured parties following default. However, as did former section 9-502 with respect to collection rights, this section also applies to the collection and enforcement rights of secured parties even if a default has not occurred, as long as the debtor has so agreed. It is not unusual for debtors to agree that secured parties are entitled to collect and enforce rights against account debtors prior to default.

5. Collections by Junior Secured Party. A secured party who holds a security interest in a right to payment may exercise the right to collect and enforce under this section, even if the security interest is subordinate to a conflicting security interest in the same right to payment. Whether the junior secured party has priority in the collected proceeds depends on whether the junior secured party qualifies for priority as a purchaser of an instrument (e.g., the account debtor's check) under section 9-330(d), as a holder in due course of an instrument under sections 3-305 and 9-331(a), or as a transferee of money under section 9-332(a). See sections 9-330, comment 7; 9-331, comment 5; and 9-332.

6. Relationship to Rights and Duties of Persons Obligated on Collateral. This section permits a secured party to collect and enforce obligations included in collateral in its capacity as a secured party. It is not necessary for a secured party first to become the owner of the collateral pursuant to a disposition or acceptance. However, the secured party's rights, as between it and the debtor, to collect from and enforce collateral against account debtors and others obligated on collateral under subsection (a) are subject to section 9-341, part 4, and other applicable law. Neither this section nor former section 9-502 should be understood to regulate the duties of an account debtor or other person obligated on collateral. Subsection (e) makes this explicit. For example, the secured party may be unable to exercise the debtor's rights under an instrument if the debtor is in possession of the instrument, or under a nontransferable letter of credit if the debtor is the beneficiary. Unless a secured party has control over a letter-of-credit right and is entitled to receive payment or performance from the issuer or a nominated person under article 5, its remedies with respect to the letter-of-credit right may be limited to the recovery of any identifiable proceeds from the debtor. This section establishes only the baseline rights of the secured party vis-a-vis the debtor - the secured party is entitled to enforce and collect after default or earlier if so agreed.

7. Deposit Account Collateral. Subsections (a)(4) and (5) set forth the self-help remedy for a secured party whose collateral is a deposit account. Subsection (a)(4) addresses the rights of a secured party that is the bank with which the deposit account is maintained. That secured party automatically has control of the deposit account under section 9-104(a)(1). After default, and otherwise if so agreed, the bank/secured party may apply the funds on deposit to the secured obligation.

If a security interest of a third party is perfected by control (section 9-104(a)(2) or (a)(3)), then after default, and otherwise if so agreed, the secured party may instruct the bank to pay out the funds in the account. If the third party has control under section 9-104(a)(3), the depositary institution is obliged to obey the instruction because the secured party is its customer. See section 4-401. If the third party has control under section 9-104(a)(2), the control agreement determines the depositary institution's obligation to obey.

If a security interest in a deposit account is unperfected, or is perfected by filing by virtue of the proceeds rules of section 9-315, the depositary institution ordinarily owes no obligation to obey the secured party's instructions. See section 9-341. To reach the funds without the debtor's cooperation, the secured party must use an available judicial procedure.

8. Rights Against Mortgagor of Real Property. Subsection (b) addresses the situation in which the collateral consists of a mortgage note (or other obligation secured by a mortgage on real property). After the debtor's (mortgagee's) default, the secured party (assignee) may wish to proceed with a nonjudicial foreclosure of the mortgage securing the note but may be unable to do so because it has not become the assignee of record. The assignee/secured party may not have taken a recordable assignment at the commencement of the transaction (perhaps the mortgage note in question was one of hundreds assigned to the secured party as collateral). Having defaulted, the mortgagee may be unwilling to sign a recordable assignment. This section enables the secured party (assignee) to become the assignee of record by recording in the applicable real property records the security agreement and an affidavit certifying default. Of course, the secured party's rights derive from those of its debtor. Subsection (b) would not entitle the secured party to proceed with a foreclosure unless the mortgagor also were in default or the debtor (mortgagee) otherwise enjoyed the right to foreclose.

9. Commercial Reasonableness. Subsection (c) provides that the secured party's collection and enforcement rights under subsection (a) must be exercised in a commercially reasonable manner. These rights include the right to settle and compromise claims against the account debtor. The secured party's failure to observe the standard of commercial reasonableness could render it liable to an aggrieved person under section 9-625, and the secured party's recovery of a deficiency would be subject to section 9-626. Subsection (c) does not apply if, as is characteristic of most sales of accounts, chattel paper, payment intangibles, and promissory notes, the secured party (buyer) has no right of recourse against the debtor (seller) or a secondary obligor. However, if the secured party does have a right of recourse, the commercial reasonableness standard applies to collection and enforcement even though the assignment to the secured party was a "true" sale. The obligation to proceed in a commercially reasonable manner arises because the collection process affects the extent of the seller's recourse liability, not because the seller retains an interest in the sold collateral (the seller does not). Concerning classification of a transaction, see section 9-109, comment 4.

10. Attorney's Fees and Legal Expenses. The phrase "reasonable attorney's fees and legal expenses," which appears in subsection (d), includes only those fees and expenses incurred in proceeding against account debtors or other third parties. The secured party's right to recover these expenses from the collections arises automatically under this section. The secured party also may incur other attorney's fees and legal expenses in proceeding against the debtor or obligor. Whether the secured party has a right to recover those fees and expenses depends on whether the debtor or obligor has agreed to pay them, as is the case with respect to attorney's fees and legal expenses under sections 9-608(a)(1)(A) and 9-615(a)(1). The parties also may agree to allocate a portion of the secured party's overhead to collection and enforcement under subsection (d) or section 9-608(a).

OFFICIAL COMMENT

Comment. - 1. Source. Subsection (a) is new; subsection (b) derives from former section 9-502(2).

2. Modifications of Prior Law. Subsections (a) and (b) modify former section 9-502(2) by explicitly providing for the application of proceeds recovered by the secured party in substantially the same manner as provided in section 9-615(a) and (e) for dispositions of collateral.

3. Surplus and Deficiency. Subsections (a)(4) and (b) omit, as unnecessary, the references contained in former section 9-502(2) to agreements varying the baseline rules on surplus and deficiency. The parties are always free to agree that an obligor will not be liable for a deficiency, even if the collateral secures an obligation, and that an obligor is liable for a deficiency, even if the transaction is a sale of receivables. For parallel provisions, see section 9-615(d) and (e).

4. Noncash Proceeds. Subsection (a)(3) addresses the situation in which an enforcing secured party receives noncash proceeds.

Example: An enforcing secured party receives a promissory note from an account debtor who is unable to pay an account when it is due. The secured party accepts the note in exchange for extending the date on which the account debtor's obligation is due. The secured party may wish to credit its debtor (the assignor) with the principal amount of the note upon receipt of the note, but probably will prefer to credit the debtor only as and when the note is paid.

Under subsection (a)(3), the secured party is under no duty to apply the note or its value to the outstanding obligation unless its failure to do so would be commercially unreasonable. If the secured party does apply the note to the outstanding obligation, however, it must do so in a commercially reasonable manner. The parties may provide for the method of application of noncash proceeds by agreement, if the method is not manifestly unreasonable. See section 9-603. This section does not explain when the failure to apply noncash proceeds would be commercially unreasonable; it leaves that determination to case-by-case adjudication. In the example, the secured party appears to have accepted the account debtor's note in order to increase the likelihood of payment and decrease the likelihood that the account debtor would dispute its obligation. Under these circumstances, it may well be commercially reasonable for the secured party to credit its debtor's obligations only as and when cash proceeds are collected from the account debtor, especially given the uncertainty that attends the account debtor's eventual payment. For an example of a secured party's receipt of noncash proceeds in which it may well be commercially unreasonable for the secured party to delay crediting its debtor's obligations with the value of noncash proceeds, see section 9-615, comment 3.

When the secured party is not required to "apply or pay over for application noncash proceeds," the proceeds nonetheless remain collateral subject to this article. If the secured party were to dispose of them, for example, appropriate notification would be required (see section 9-611), and the disposition would be subject to the standards provided in this part (see section 9-610). Moreover, a secured party in possession of the noncash proceeds would have the duties specified in section 9-207.

5. No Effect on Priority of Senior Security Interest. The application of proceeds required by subsection (a) does not affect the priority of a security interest in collateral which is senior to the interest of the secured party who is collecting or enforcing collateral under section 9-607. Although subsection (a) imposes a duty to apply proceeds to the enforcing secured party's expenses and to the satisfaction of the secured obligations owed to it and to subordinate secured parties, that duty applies only among the enforcing secured party and those persons. Concerning the priority of a junior secured party who collects and enforces collateral, see section 9-607, comment 5.

CASE NOTES

Former § 8.9-609 was merely a codification of the common law. Greene v. First Nat'l Exch. Bank, 348 F. Supp. 672 (W.D. Va. 1972).

Self-help has always been part of the common law which does not require the intervention of the State's power. Greene v. First Nat'l Exch. Bank, 348 F. Supp. 672 (W.D. Va. 1972).

And it does not violate the Fourteenth Amendment. - This section, which allows the secured party to take possession of the collateral without judicial intervention if it can be done without a breach of the peace, does not violate the Fourteenth Amendment of the federal Constitution. Greene v. First Nat'l Exch. Bank, 348 F. Supp. 672 (W.D. Va. 1972).

The Fourteenth Amendment of the federal Constitution can control only the actions of states, not private individuals. Therefore, because the operation of this section does not require the aid, assistance, or interaction of any State agent, body, organization, or function, the State has not deprived a plaintiff of his property where, on default by plaintiff of purchase payments, a bank repossessed his car. Greene v. First Nat'l Exch. Bank, 348 F. Supp. 672 (W.D. Va. 1972).

A breach of contract does not necessarily constitute a default under a security agreement; moreover, when a default occurs, a secured creditor is required to comply with Article 9 (now 9A) of the UCC in taking possession and selling the secured property. C.F. Garcia Enters., Inc. v. Enterprise Ford Tractor, Inc., 480 S.E.2d 497 (1997).

Private repossession was not "under color of law". - See McDuffy v. Worthmore Furn., Inc., 380 F. Supp. 257 (E.D. Va. 1974).

In view of the legal, historical and commercial acceptance of private repossession which shaped the atmosphere into which this section was introduced, the overall effect of the passage of this section cannot be found sufficient to transpose the same conduct which was privately carried on within the law before its enactment into state action. McDuffy v. Worthmore Furn., Inc., 380 F. Supp. 257 (E.D. Va. 1974).

Former § 8.9-503 provided for self-help only if it could be attained peacefully. Thus, an aggrieved party had access to the courts if self-help was not used properly. Greene v. First Nat'l Exch. Bank, 348 F. Supp. 672 (W.D. Va. 1972).

Creditors may enter on to the debtor's land to repossess the collateral because the vindication of the creditor's security interest is considered more important than a trespass. If, however, the debtor is present and makes an objection, the breach of the peace analysis comes to the fore: the creditor's agent must then desist. Wallace v. Chrysler Credit Corp., 743 F. Supp. 1228 (W.D. Va. 1990).

Dismissal of the lessor's conversion claim was reversed and remanded, where the lessor asserted a property interest in the collateral at issue under § 8.9-503, and made a demand on defendants to relinquish possession of the collateral; no further self-help was required. Orix Credit Alliance, Inc. v. Young Express, Inc.,, 2002 U.S. App. LEXIS 17602 (4th Cir. Aug. 22, 2002).

When conduct constitutes breach of the peace. - Breach of the peace refers to conduct at or near and/or incident to the seizure of the property. Wallace v. Chrysler Credit Corp., 743 F. Supp. 1228 (W.D. Va. 1990).

Once a creditor has gained sufficient dominion over his collateral, objection by the debtor will be of no avail. Wallace v. Chrysler Credit Corp., 743 F. Supp. 1228 (W.D. Va. 1990).

Permissible conduct. - The repossession of movable collateral such as cars from property owned by a third party or from a public place cannot amount to a breach of the peace (unless there is opposition to the removal). This is because the debtor's real property interest is not invaded. Wallace v. Chrysler Credit Corp., 743 F. Supp. 1228 (W.D. Va. 1990).

Even assuming that some traffic regulation may be violated during the repossession of a vehicle, the act of doing so is not an incitement to violence or to break the peace. Wallace v. Chrysler Credit Corp., 743 F. Supp. 1228 (W.D. Va. 1990).

The use of stealth in a self-help repossession is not a breach of the peace. Wallace v. Chrysler Credit Corp., 743 F. Supp. 1228 (W.D. Va. 1990).

Although the full-color presence of a law enforcement officer at a self-help repossession, even though intended to prevent a breach of the peace, establishes an actual breach of peace, where repossession was not in any sense aided by the force majeure of the defendant's office because it was only after repossession that plaintiff was even aware that the defendant was a deputy, there was no breach of the peace. Wallace v. Chrysler Credit Corp., 743 F. Supp. 1228 (W.D. Va. 1990).

Redemption in bankruptcy. - Repossession of the debtor's car prior to the Chapter 13 bankruptcy did not extinguish the debtor's interest in the car under §§ 8.9A-609 , 8.9A-615 , 8.9A-619 (c) , and 46.2-633, and the debtor's plan could effectuate a redemption under § 8.9A-623 by paying the creditor in full by resuming payments and paying delinquent installments within a reasonable time; thus, the creditor's motion for relief from the automatic stay under 11 U.S.C.S. § 362(d)(1) was denied. Tidewater Fin. Co. v. Moffett (In re Moffett), 288 Bankr. 721, 2002 Bankr. LEXIS 760 (Bankr. E.D. Va. 2002), aff'd, 289 Bankr. 55 (Bankr. E.D. Va. 2003).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-503.

2. Secured Party's Right to Possession. This section follows former section 9-503 and earlier uniform legislation. It provides that the secured party is entitled to take possession of collateral after default.

3. Judicial Process; Breach of Peace. Subsection (b) permits a secured party to proceed under this section without judicial process if it does so "without breach of the peace." Although former section 9-503 placed the same condition on a secured party's right to take possession of collateral, subsection (b) extends the condition to the right provided in subsection (a)(2) as well. Like former section 9-503, this section does not define or explain the conduct that will constitute a breach of the peace, leaving that matter for continuing development by the courts. In considering whether a secured party has engaged in a breach of the peace, however, courts should hold the secured party responsible for the actions of others taken on the secured party's behalf, including independent contractors engaged by the secured party to take possession of collateral.

This section does not authorize a secured party who repossesses without judicial process to utilize the assistance of a law enforcement officer. A number of cases have held that a repossessing secured party's use of a law enforcement officer without benefit of judicial process constituted a failure to comply with former section 9-503.

4. Damages for Breach of Peace. Concerning damages that may be recovered based on a secured party's breach of the peace in connection with taking possession of collateral, see section 9-625, comment 3.

5. Multiple Secured Parties. More than one secured party may be entitled to take possession of collateral under this section. Conflicting rights to possession among secured parties are resolved by the priority rules of this article. Thus, a senior secured party is entitled to possession as against a junior claimant. Non-UCC law governs whether a junior secured party in possession of collateral is liable to the senior in conversion. Normally, a junior who refuses to relinquish possession of collateral upon the demand of a secured party having a superior possessory right to the collateral would be liable in conversion.

6. Secured Party's Right to Disable and Dispose of Equipment on Debtor's Premises. In the case of some collateral, such as heavy equipment, the physical removal from the debtor's plant and the storage of the collateral pending disposition may be impractical or unduly expensive. This section follows former section 9-503 by providing that, in lieu of removal, the secured party may render equipment unusable or may dispose of collateral on the debtor's premises. Unlike former section 9-503, however, this section explicitly conditions these rights on the debtor's default. Of course, this section does not validate unreasonable action by a secured party. Under section 9-610, all aspects of a disposition must be commercially reasonable.

7. Debtor's Agreement to Assemble Collateral. This section follows former section 9-503 also by validating a debtor's agreement to assemble collateral and make it available to a secured party at a place that the secured party designates. Similar to the treatment of agreements to permit collection prior to default under section 9-607 and former section 9-502, however, this section validates these agreements whether or not they are conditioned on the debtor's default. For example, a debtor might agree to make available to a secured party, from time to time, any instruments or negotiable documents that the debtor receives on account of collateral. A court should not infer from this section's validation that a debtor's agreement to assemble and make available collateral would not be enforceable under other applicable law.

8. Agreed Standards. Subject to the limitation imposed by section 9-603(b), this section's provisions concerning agreements to assemble and make available collateral and a secured party's right to disable equipment and dispose of collateral on a debtor's premises are likely topics for agreement on standards as contemplated by section 9-603.

CASE NOTES

Commercially reasonable. - The statute provides that collateral may be disposed of by public or private proceedings and that "every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable." Charles E. Brauer Co. v. NationsBank, 251 Va. 28 , 466 S.E.2d 382 (1996).

The commercial reasonableness standard becomes relevant only when a secured lender "disposes" of the collateral. Charles E. Brauer Co. v. NationsBank, 251 Va. 28 , 466 S.E.2d 382 (1996).

The term "disposition" is not defined in the Uniform Commercial Code (U.C.C.), but the language of this section indicates that it means an actual transfer of an interest in the collateral by sale, lease, or contract. Charles E. Brauer Co. v. NationsBank, 251 Va. 28 , 466 S.E.2d 382 (1996).

Subsection (3) of former § 8.9-504 did not apply if the seller of the collateral was the borrower rather than the secured party. Charles E. Brauer Co. v. NationsBank, 251 Va. 28 , 466 S.E.2d 382 (1996).

The creditor has the burden of proving commercial reasonableness. Woodward v. Resource Bank, 246 Va. 481 , 436 S.E.2d 613 (1993).

Creditor not denied deficiency claim based on failure to give notice. - Secured creditor was not denied a deficiency claim in Chapter 13 proceeding solely on the ground that the secured creditor failed to give the debtor the requisite notice under this section; the court found that lack of notice was less likely to result in a sale that was not commercially reasonable than the defects found in the Bishop, 482 F.2d 381 (4th Cir. 1973), sale; thus, the court found that it would be unduly harsh to impose a per se rule on secured creditor and the "no harm no foul" rule was followed in the case. In re Parrish, 110 Bankr. 229 (Bankr. W.D. Va. 1989).

Debtor had no interest in collateral. - Where consumer plaintiffs never had a security interest in a vehicle, or they effectively rescinded their interest for purposes of the Uniform Commercial Code and admitted that a valid contract never existed between the parties, protections under §§ 8.9A-610 through 8.9A-612 did not apply. Drewry v. Starr Motors, Inc.,, 2008 U.S. Dist. LEXIS 38534 (E.D. Va. May 12, 2008).

Notice provision may not be waived before the occurrence of a default. Woodward v. Resource Bank, 246 Va. 481 , 436 S.E.2d 613 (1993).

Bank provided proper notice. - Bankruptcy court's finding that bank violated the Virginia Commercial Code by failing to provide proper notice of the sale was clearly erroneous where notice letter, which was entered into evidence at the hearing, contained debtor's correct address. NationsBank v. Bush, 169 Bankr. 34 (W.D. Va. 1994).

The guarantor, prior to default, may waive the rights which subsection (3) of former § 8.9-504 expressly conferred on debtors. Chrysler Credit Corp. v. Curley, 753 F. Supp. 611 (E.D. Va. 1990).

In the absence of explicit statutory direction, guarantors should not be prohibited from waiving the right to notice or the right to object the commercial reasonableness of the collateral disposition. Chrysler Credit Corp. v. Curley, 753 F. Supp. 611 (E.D. Va. 1990).

A breach of contract does not necessarily constitute a default under a security agreement; moreover, when a default occurs, a secured creditor is required to comply with Article 9 (now 9A) of the UCC in taking possession and selling the secured property. C.F. Garcia Enters., Inc. v. Enterprise Ford Tractor, Inc., 480 S.E.2d 497 (1997).

Ownership interest not affected by breach. - Plaintiff's contract breach in failing to notify defendant of its intention to purchase backhoe and to pay the $1 did not constitute a default nor affect plaintiff's ownership interest in the backhoe. C.F. Garcia Enters., Inc. v. Enterprise Ford Tractor, Inc., 480 S.E.2d 497 (1997).

Applied in Tidewater Fin. Co. v. Moffett (In re Moffett), 356 F.3d 518, 2004 U.S. App. LEXIS 1011 (4th Cir. 2004).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-504(1), (3).

2. Commercially Reasonable Dispositions. Subsection (a) follows former section 9-504 by permitting a secured party to dispose of collateral in a commercially reasonable manner following a default. Although subsection (b) permits both public and private dispositions, including public and private dispositions conducted over the Internet, "every aspect of a disposition . . . must be commercially reasonable." This section encourages private dispositions on the assumption that they frequently will result in higher realization on collateral for the benefit of all concerned. Subsection (a) does not restrict dispositions to sales; collateral may be sold, leased, licensed, or otherwise disposed. Section 9-627 provides guidance for determining the circumstances under which a disposition is "commercially reasonable."

3. Time of Disposition. This article does not specify a period within which a secured party must dispose of collateral. This is consistent with this article's policy to encourage private dispositions through regular commercial channels. It may, for example, be prudent not to dispose of goods when the market has collapsed. Or, it might be more appropriate to sell a large inventory in parcels over a period of time instead of in bulk. Of course, under subsection (b) every aspect of a disposition of collateral must be commercially reasonable. This requirement explicitly includes the "method, manner, time, place, and other terms." For example, if a secured party does not proceed under section 9-620 and holds collateral for a long period of time without disposing of it, and if there is no good reason for not making a prompt disposition, the secured party may be determined not to have acted in a "commercially reasonable" manner. See also section 1-203 (general obligation of good faith).

4. Pre-Disposition Preparation and Processing. Former section 9-504(1) appeared to give the secured party the choice of disposing of collateral either "in its then condition or following any commercially reasonable preparation or processing." Some courts held that the "commercially reasonable" standard of former section 9-504(3) nevertheless could impose an affirmative duty on the secured party to process or prepare the collateral prior to disposition. Subsection (a) retains the substance of the quoted language. Although courts should not be quick to impose a duty of preparation or processing on the secured party, subsection (a) does not grant the secured party the right to dispose of the collateral "in its then condition" under all circumstances. A secured party may not dispose of collateral "in its then condition" when, taking into account the costs and probable benefits of preparation or processing and the fact that the secured party would be advancing the costs at its risk, it would be commercially unreasonable to dispose of the collateral in that condition.

5. Disposition by Junior Secured Party. Disposition rights under subsection (a) are not limited to first-priority security interests. Rather, any secured party as to whom there has been a default enjoys the right to dispose of collateral under this subsection. The exercise of this right by a secured party whose security interest is subordinate to that of another secured party does not of itself constitute a conversion or otherwise give rise to liability in favor of the holder of the senior security interest. Section 9-615 addresses application of the proceeds of a disposition by a junior secured party. Under section 9-615(a), a junior secured party owes no obligation to apply the proceeds of disposition to the satisfaction of obligations secured by a senior security interest. Section 9-615(g) builds on this general rule by protecting certain juniors from claims of a senior concerning cash proceeds of the disposition. Even if a senior were to have a nonarticle 9 claim to proceeds of a junior's disposition, section 9-615(g) would protect a junior that acts in good faith and without knowledge that its actions violate the rights of a senior party. Because the disposition by a junior would not cut off a senior's security interest or other lien (see section 9-617), in many (probably most) cases the junior's receipt of the cash proceeds would not violate the rights of the senior.

The holder of a senior security interest is entitled, by virtue of its priority, to take possession of collateral from the junior secured party and conduct its own disposition, provided that the senior enjoys the right to take possession of the collateral from the debtor. See section 9-609. The holder of a junior security interest normally must notify the senior secured party of an impending disposition. See section 9-611. Regardless of whether the senior receives a notification from the junior, the junior's disposition does not of itself discharge the senior's security interest. See section 9-617. Unless the senior secured party has authorized the disposition free and clear of its security interest, the senior's security interest ordinarily will survive the disposition by the junior and continue under section 9-315(a)(1). If the senior enjoys the right to repossess the collateral from the debtor, the senior likewise may recover the collateral from the transferee.

When a secured party's collateral is encumbered by another security interest or other lien, one of the claimants may seek to invoke the equitable doctrine of marshaling. As explained by the Supreme Court, that doctrine "rests upon the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor, who may resort to only one of the funds." Meyer v. United States, 375 U.S. 233, 236 (1963), quoting Sowell v. Federal Reserve Bank, 268 U.S. 449, 456-57 (1925). The purpose of the doctrine is "to prevent the arbitrary action of a senior lienor from destroying the rights of a junior lienor or a creditor having less security." Id. at 237. Because it is an equitable doctrine, marshaling "is applied only when it can be equitably fashioned as to all of the parties" having an interest in the property. Id. This article leaves courts free to determine whether marshaling is appropriate in any given case. See section 1-103.

6. Security Interests of Equal Rank. Sometimes two security interests enjoy the same priority. This situation may arise by contract, e.g., pursuant to "equal and ratable" provisions in indentures, or by operation of law. See section 9-328(6). This article treats a security interest having equal priority like a senior security interest in many respects. Assume, for example, that SP-X and SP-Y enjoy equal priority, SP-W is senior to them, and SP-Z is junior. If SP-X disposes of the collateral under this section, then (i) SP-W's and SP-Y's security interests survive the disposition but SP-Z's does not, see section 9-617, and (ii) neither SP-W nor SP-Y is entitled to receive a distribution of proceeds, but SP-Z is. See section 9-615(a)(3).

When one considers the ability to obtain possession of the collateral, a secured party with equal priority is unlike a senior secured party. As the senior secured party, SP-W should enjoy the right to possession as against SP-X. See section 9-609, comment 5. If SP-W takes possession and disposes of the collateral under this section, it is entitled to apply the proceeds to satisfy its secured claim. SP-Y, however, should not have such a right to take possession from SP-X; otherwise, once SP-Y took possession from SP-X, SP-X would have the right to get possession from SP-Y, which would be obligated to redeliver possession to SP-X, and so on. Resolution of this problem is left to the parties and, if necessary, the courts.

7. Public vs. Private Dispositions. This part maintains two distinctions between "public" and other dispositions: (i) The secured party may buy at the former, but normally not at the latter (section 9-610(c)), and (ii) the debtor is entitled to notification of "the time and place of a public disposition" and notification of "the time after which" a private disposition or other intended disposition is to be made (section 9-613(1)(E)). It does not retain the distinction under former section 9-504(4), under which transferees in a noncomplying public disposition could lose protection more easily than transferees in other noncomplying dispositions. Instead, section 9-617(b) adopts a unitary standard. Although the term is not defined, as used in this article, a "public disposition" is one at which the price is determined after the public has had a meaningful opportunity for competitive bidding. "Meaningful opportunity" is meant to imply that some form of advertisement or public notice must precede the sale (or other disposition) and that the public must have access to the sale (disposition).

A secured party's purchase of collateral at its own private disposition is equivalent to a "strict foreclosure" and is governed by Sections 9-620, 9-621, and 9-622. The provisions of these sections can be waived only to the extent provided in Section 9-624(b). See Section 9-602.

8. Investment Property. Dispositions of investment property may be regulated by the federal securities laws. Although a "public" disposition of securities under this article may implicate the registration requirements of the Securities Act of 1933, it need not do so. A disposition that qualifies for a "private placement" exemption under the Securities Act of 1933 nevertheless may constitute a "public" disposition within the meaning of this section. Moreover, the "commercially reasonable" requirements of subsection (b) need not prevent a secured party from conducting a foreclosure sale without the issuer's compliance with federal registration requirements.

9. "Recognized Market." A "recognized market," as used in subsection (c) and section 9-611(d), is one in which the items sold are fungible and prices are not subject to individual negotiation. For example, the New York Stock Exchange is a recognized market. A market in which prices are individually negotiated or the items are not fungible is not a recognized market, even if the items are the subject of widely disseminated price guides or are disposed of through dealer auctions.

10. Relevance of Price. While not itself sufficient to establish a violation of this part, a low price suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable. Note also that even if the disposition is commercially reasonable, section 9-615(f) provides a special method for calculating a deficiency or surplus if (i) the transferee in the disposition is the secured party, a person related to the secured party, or a secondary obligor, and (ii) the amount of proceeds of the disposition is significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.

11. Warranties. Subsection (d) affords the transferee in a disposition under this section the benefit of any title, possession, quiet enjoyment, and similar warranties that would have accompanied the disposition by operation of nonarticle 9 law had the disposition been conducted under other circumstances. For example, the article 2 warranty of title would apply to a sale of goods, the analogous warranties of article 2A would apply to a lease of goods, and any common law warranties of title would apply to dispositions of other types of collateral. See, e.g., Restatement (2d), Contracts section 333 (warranties of assignor).

Subsection (e) explicitly provides that these warranties can be disclaimed either under other applicable law or by communicating a record containing an express disclaimer. The record need not be written, but an oral communication would not be sufficient. See section 9-102 (definition of "record"). Subsection (f) provides a sample of wording that will effectively exclude the warranties in a disposition under this section, whether or not the exclusion would be effective under nonarticle 9 law.

The warranties incorporated by subsection (d) are those relating to "title, possession, quiet enjoyment, and the like." Depending on the circumstances, a disposition under this section also may give rise to other statutory or implied warranties, e.g., warranties of quality or fitness for purpose. Law other than this article determines whether such other warranties apply to a disposition under this section. Other law also determines issues relating to disclaimer of such warranties. For example, a foreclosure sale of a car by a car dealer could give rise to an implied warranty of merchantability (section 2-314) unless effectively disclaimed or modified (section 2-316).

This section's approach to these warranties conflicts with the former comment to section 2-312. This article rejects the baseline assumption that commercially reasonable dispositions under this section are out of the ordinary commercial course or peculiar. The comment to section 2-312 has been revised accordingly.

CASE NOTES

Entitlement to notice of sale. - Guarantors of note were debtors and thus were entitled to notice of sale of collateral. Woodward v. Resource Bank, 246 Va. 481 , 436 S.E.2d 613 (1993).

In a buyer's suit against a seller based on a failed car purchase and financing transaction, the seller violated this section because it repossessed and sold the car without providing the buyer required notice of the sale. Barnette v. Brook Rd., Inc., 457 F. Supp. 2d 647, 2006 U.S. Dist. LEXIS 94811 (E.D. Va. 2006).

When a consumer purchased a vehicle from a dealer, but a lender declined to provide financing for the sale, after which the dealer repossessed the vehicle, the consumer was entitled to the remedies in subsection (c) of § 8.9A-625 because: (1) the consumer was a "debtor," under subdivision (a)(28)(A) of § 8.9A-102 ; (2) while the dealer had the right to repossess the vehicle when financing fell through, pursuant to the parties' contract, the dealer had a duty, under §§ 8.9A-611 through 8.9A-614 , to give the consumer notice before disposing of the vehicle, since the parties did not waive this requirement and the consumer retained an interest in the car; and (3) the dealer did not provide notice. Cappo Mgmt. v. V Britt, 282 Va. 33 , 711 S.E.2d 209, 2011 Va. LEXIS 124 (2011).

The essence of a "public sale" is that the relevant public is not only invited to attend but is also informed, by whatever means of publicity may be appropriate, when and where the sale is to be held. If the sale has not been appropriately publicized, it would not be a public sale. In re Bishop, 482 F.2d 381 (4th Cir. 1973).

Disposing collateral in a commercially reasonable manner. - A secured party upon default may dispose of the collateral in a commercially reasonable manner upon reasonable notification to the debtor. Bush v. Nationsbank, 166 Bankr. 69 (Bankr. W.D. Va.), rev'd on other grounds, NationsBank v. Bush, 169 Bankr. 34 (W.D. Va. 1994).

"Debtor" includes owner of collateral and obligor. - The context in which the term "debtor" was employed in subsection (3) of former § 8.9-504 required that the term be interpreted to include both the owner of the collateral and the obligor, if they are not the same person and included a comaker or guarantor of the obligation. Rhoten v. United Va. Bank, 221 Va. 222 , 269 S.E.2d 781 (1980).

Debtor had no interest in collateral. - Where consumer plaintiffs never had a security interest in a vehicle, or they effectively rescinded their interest for purposes of the Uniform Commercial Code and admitted that a valid contract never existed between the parties, protections under §§ 8.9A-610 through 8.9A-612 did not apply. Drewry v. Starr Motors, Inc.,, 2008 U.S. Dist. LEXIS 38534 (E.D. Va. May 12, 2008).

Applied in Tidewater Fin. Co. v. Moffett (In re Moffett), 356 F.3d 518, 2004 U.S. App. LEXIS 1011 (4th Cir. 2004).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-504(3).

2. Reasonable Notification. This section requires a secured party who wishes to dispose of collateral under section 9-610 to send "a reasonable authenticated notification of disposition" to specified interested persons, subject to certain exceptions. The notification must be reasonable as to the manner in which it is sent, its timeliness (i.e., a reasonable time before the disposition is to take place), and its content. See sections 9-612 (timeliness of notification), 9-613 (contents of notification generally), 9-614 (contents of notification in consumer-goods transactions).

3. Notification to Debtors and Secondary Obligors. This section imposes a duty to send notification of a disposition not only to the debtor but also to any secondary obligor. Subsections (b) and (c) resolve an uncertainty under former article 9 by providing that secondary obligors (sureties) are entitled to receive notification of an intended disposition of collateral, regardless of who created the security interest in the collateral. If the surety created the security interest, it would be the debtor. If it did not, it would be a secondary obligor. (This article also resolves the question of the secondary obligor's ability to waive, pre-default, the right to notification - waiver generally is not permitted. See section 9-602.) Section 9-605 relieves a secured party from any duty to send notification to a debtor or secondary obligor unknown to the secured party.

Under subsection (b), the principal obligor (borrower) is not always entitled to notification of disposition.

Example: Behnfeldt borrows on an unsecured basis, and Bruno grants a security interest in her car to secure the debt. Behnfeldt is a primary obligor, not a secondary obligor. As such, she is not entitled to notification of disposition under this section.

4. Notification to Other Secured Parties. Prior to the 1972 amendments to article 9, former section 9-504(3) required the enforcing secured party to send reasonable notification of the disposition:

except in the case of consumer goods to any other person who has a security interest in the collateral and who has duly filed a financing statement indexed in the name of the debtor in this State or who is known by the secured party to have a security interest in the collateral.

The 1972 amendments eliminated the duty to give notice to secured parties other than those from whom the foreclosing secured party had received written notice of a claim of an interest in the collateral.

Many of the problems arising from dispositions of collateral encumbered by multiple security interests can be ameliorated or solved by informing all secured parties of an intended disposition and affording them the opportunity to work with one another. To this end, subsection (c)(3)(B) expands the duties of the foreclosing secured party to include the duty to notify (and the corresponding burden of searching the files to discover) certain competing secured parties. The subsection imposes a search burden that in some cases may be greater than the pre-1972 burden on foreclosing secured parties but certainly is more modest than that faced by a new secured lender.

To determine who is entitled to notification, the foreclosing secured party must determine the proper office for filing a financing statement as of a particular date, measured by reference to the "notification date," as defined in subsection (a). This determination requires reference to the choice of law provisions of part 3. The secured party must ascertain whether any financing statements covering the collateral and indexed under the debtor's name, as the name existed as of that date, in fact were filed in that office. The foreclosing secured party generally need not notify secured parties whose effective financing statements have become more difficult to locate because of changes in the location of the debtor, proceeds rules, or changes in the name that is sufficient as the name of the debtor under Section 9-503(a).

Under subsection (c)(3)(C), the secured party also must notify a secured party who has perfected a security interest by complying with a statute or treaty described in section 9-311(a), such as a certificate of title statute.

Subsection (e) provides a "safe harbor" that takes into account the delays that may be attendant to receiving information from the public filing offices. It provides, generally, that the secured party will be deemed to have satisfied its notification duty under subsection (c)(3)(B) if it requests a search from the proper office at least 20 but not more than 30 days before sending notification to the debtor and if it also sends a notification to all secured parties (and other lienholders) reflected on the search report. The secured party's duty under subsection (c)(3)(B) also will be satisfied if the secured party requests but does not receive a search report before the notification is sent to the debtor. Thus, if subsection (e) applies, a secured party who is entitled to notification under subsection (c)(3)(B) has no remedy against a foreclosing secured party who does not send the notification. The foreclosing secured party has complied with the notification requirement. Subsection (e) has no effect on the requirements of the other paragraphs of subsection (c). For example, if the foreclosing secured party received a notification from the holder of a conflicting security interest in accordance with subsection (c)(3)(A) but failed to send to the holder a notification of the disposition, the holder of the conflicting security interest would have the right to recover any loss under section 9-625(b).

5. Authentication Requirement. Subsections (b) and (c) explicitly provide that a notification of disposition must be "authenticated." Some cases read former section 9-504(3) as validating oral notification.

6. Second Try. This article leaves to judicial resolution, based upon the facts of each case, the question whether the requirement of "reasonable notification" requires a "second try," i.e., whether a secured party who sends notification and learns that the debtor did not receive it must attempt to locate the debtor and send another notification.

7. Recognized Market; Perishable Collateral. New subsection (d) makes it clear that there is no obligation to give notification of a disposition in the case of perishable collateral or collateral customarily sold on a recognized market (e.g., marketable securities). Former section 9-504(3) might be read (incorrectly) to relieve the secured party from its duty to notify a debtor but not from its duty to notify other secured parties in connection with dispositions of such collateral.

8. Failure to Conduct Notified Disposition. Nothing in this article prevents a secured party from electing not to conduct a disposition after sending a notification. Nor does this article prevent a secured party from electing to send a revised notification if its plans for disposition change. This assumes, however, that the secured party acts in good faith, the revised notification is reasonable, and the revised plan for disposition and any attendant delay are commercially reasonable.

9. Waiver. A debtor or secondary obligor may waive the right to notification under this section only by a post-default authenticated agreement. See section 9-624(a).

10. Other Law. Other State or federal law may contain requirements concerning notification of a disposition of property by a secured party. For example, federal law imposes notification requirements with respect to the enforcement of mortgages on federally documented vessels. Principles of statutory interpretation and, in the context of federal law, supremacy and preemption determine whether and to what extent law other than this Article supplements, displaces, or is displaced by this Article. See Sections 1-103, 1-104, 9-109(c)(1).

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Reasonable Notification. Section 9-611(b) requires the secured party to send a "reasonable authenticated notification." Under that section, as under former section 9-504(3), one aspect of a reasonable notification is its timeliness. This generally means that the notification must be sent at a reasonable time in advance of the date of a public disposition or the date after which a private disposition is to be made. A notification that is sent so near to the disposition date that a notified person could not be expected to act on or take account of the notification would be unreasonable.

3. Timeliness of Notification: Safe Harbor. The 10-day notice period in subsection (b) is intended to be a "safe harbor" and not a minimum requirement. To qualify for the "safe harbor" the notification must be sent after default. A notification also must be sent in a commercially reasonable manner. See section 9-611(b) ("reasonable authenticated notification"). These requirements prevent a secured party from taking advantage of the "safe harbor" by, for example, giving the debtor a notification at the time of the original extension of credit or sending the notice by surface mail to a debtor overseas.

CASE NOTES

The Commercial Code of Virginia imposes liability on a secured creditor who disposes of collateral without complying therewith and a debtor may recover losses due to creditor's noncompliance. Bush v. Nationsbank, 166 Bankr. 69 (Bankr. W.D. Va.), rev'd on other grounds, NationsBank v. Bush, 169 Bankr. 34 (W.D. Va. 1994) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Contents of Notification. To comply with the "reasonable authenticated notification" requirement of section 9-611(b), the contents of a notification must be reasonable. Except in a consumer-goods transaction, the contents of a notification that includes the information set forth in paragraph (1) are sufficient as a matter of law, unless the parties agree otherwise. (The reference to "time" of disposition means here, as it did in former section 9-504(3), not only the hour of the day but also the date.) Although a secured party may choose to include additional information concerning the transaction or the debtor's rights and obligations, no additional information is required unless the parties agree otherwise. A notification that lacks some of the information set forth in paragraph (1) nevertheless may be sufficient if found to be reasonable by the trier of fact, under paragraph (2). A properly completed sample form of notification in paragraph (5) or in section 9-614(3) is an example of a notification that would contain the information set forth in paragraph (1). Under paragraph (4), however, no particular phrasing of the notification is required.

This section applies to a notification of a public disposition conducted electronically. A notification of an electronic disposition satisfies paragraph (1)(E) if it states the time when the disposition is scheduled to begin and states the electronic location. For example, under the technology current in 2010, the Uniform Resource Locator (URL) or other Internet address where the site of the public disposition can be accessed suffices as an electronic location.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Notification in Consumer-Goods Transactions. Paragraph (1) sets forth the information required for a reasonable notification in a consumer-goods transaction. A notification that lacks any of the information set forth in paragraph (1) is insufficient as a matter of law. Compare section 9-613(2), under which the trier of fact may find a notification to be sufficient even if it lacks some information listed in paragraph (1) of that section.

3. Safe-Harbor Form of Notification; Errors in Information. Although paragraph (2) provides that a particular phrasing of a notification is not required, paragraph (3) specifies a safe-harbor form that, when properly completed, satisfies paragraph (1). Paragraphs (4), (5), and (6) contain special rules applicable to erroneous and additional information. Under paragraph (4), a notification in the safe-harbor form specified in paragraph (3) is not rendered insufficient if it contains additional information at the end of the form. Paragraph (5) provides that nonmisleading errors in information contained in a notification are permitted if the safe-harbor form is used and if the errors are in information not required by paragraph (1). Finally, if a notification is in a form other than the paragraph (3) safe-harbor form, other law determines the effect of including in the notification information other than that required by paragraph (1).

CASE NOTES

Redemption in bankruptcy. - Repossession of the debtor's car prior to the Chapter 13 bankruptcy did not extinguish the debtor's interest in the car under §§ 8.9A-609 , 8.9A-615 , 8.9A-619 (c) , and 46.2-633, and the debtor's plan could effectuate a redemption under § 8.9A-623 by paying the creditor in full by resuming payments and paying delinquent installments within a reasonable time; thus, the creditor's motion for relief from the automatic stay under 11 U.S.C.S. § 362(d)(1) was denied. Tidewater Fin. Co. v. Moffett (In re Moffett), 288 Bankr. 721, 2002 Bankr. LEXIS 760 (Bankr. E.D. Va. 2002), aff'd, 289 Bankr. 55 (Bankr. E.D. Va. 2003).

Seller could not sue buyer for installment payments under assigned contract. - Where a seller assigned to a finance company all of the seller's rights to payment on a contract for the sale of a truck, § 8.01-281 did not permit the seller to sue a buyer for the full amount of the installment payments due under the contract because: (1) the finance company had not even filed a claim against the seller; and (2) the finance company recouped some of the value of the sales contract by reselling the truck. Because the finance company had not sued the buyer for the remaining deficiency for which the buyer was liable pursuant to former § 8.9-504(2), the finance company was not in a posture to sue the seller. Nigh v. Koons Buick Pontiac GMC, Inc.,, 2001 U.S. Dist. LEXIS 26274 (E.D. Va. Aug. 15, 2001).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-504(1) and (2).

2. Application of Proceeds. This section contains the rules governing application of proceeds and the debtor's liability for a deficiency following a disposition of collateral. Subsection (a) sets forth the basic order of application. The proceeds are applied first to the expenses of disposition, second to the obligation secured by the security interest that is being enforced, and third, in the specified circumstances, to interests that are subordinate to that security interest.

Subsections (a) and (d) also address the right of a consignor to receive proceeds of a disposition by a secured party whose interest is senior to that of the consignor. Subsection (a) requires the enforcing secured party to pay excess proceeds first to subordinate secured parties or lienholders whose interests are senior to that of a consignor and, finally, to a consignor. Inasmuch as a consignor is the owner of the collateral, secured parties and lienholders whose interests are junior to the consignor's interest will not be entitled to any proceeds. In like fashion, under subsection (d)(1) the debtor is not entitled to a surplus when the enforcing secured party is required to pay over proceeds to a consignor.

3. Noncash Proceeds. Subsection (c) addresses the application of noncash proceeds of a disposition, such as a note or lease. The explanation in section 9-608, comment 4, generally applies to this subsection.

Example: A secured party in the business of selling or financing automobiles takes possession of collateral (an automobile) following its debtor's default. The secured party decides to sell the automobile in a private disposition under section 9-610 and sends appropriate notification under section 9-611. After undertaking its normal credit investigation and in accordance with its normal credit policies, the secured party sells the automobile on credit, on terms typical of the credit terms normally extended by the secured party in the ordinary course of its business. The automobile stands as collateral for the remaining balance of the price. The noncash proceeds received by the secured party are chattel paper. The secured party may wish to credit its debtor (the assignor) with the principal amount of the chattel paper or may wish to credit the debtor only as and when the payments are made on the chattel paper by the buyer.

Under subsection (c), the secured party is under no duty to apply the noncash proceeds (here, the chattel paper) or their value to the secured obligation unless its failure to do so would be commercially unreasonable. If a secured party elects to apply the chattel paper to the outstanding obligation, however, it must do so in a commercially reasonable manner. The facts in the example indicate that it would be commercially unreasonable for the secured party to fail to apply the value of the chattel paper to the original debtor's secured obligation. Unlike the example in comment 4 to section 9-608, the noncash proceeds received in this example are of the type that the secured party regularly generates in the ordinary course of its financing business in nonforeclosure transactions. The original debtor should not be exposed to delay or uncertainty in this situation. Of course, there will be many situations that fall between the examples presented in the comment to section 9-608 and in this comment. This article leaves their resolution to the court based on the facts of each case.

One would expect that where noncash proceeds are or may be material, the secured party and debtor would agree to more specific standards in an agreement entered into before or after default. The parties may agree to the method of application of noncash proceeds if the method is not manifestly unreasonable. See section 9-603.

When the secured party is not required to "apply or pay over for application noncash proceeds," the proceeds nonetheless remain collateral subject to this article. See section 9-608, comment 4.

4. Surplus and Deficiency. Subsection (d) deals with surplus and deficiency. It revises former section 9-504(2) by imposing an explicit requirement that the secured party "pay" the debtor for any surplus, while retaining the secured party's duty to "account." Inasmuch as the debtor may not be an obligor, subsection (d) provides that the obligor (not the debtor) is liable for the deficiency. The special rule governing surplus and deficiency when receivables have been sold likewise takes into account the distinction between a debtor and an obligor. Subsection (d) also addresses the situation in which a consignor has an interest that is subordinate to the security interest being enforced.

5. Collateral Under New Ownership. When the debtor sells collateral subject to a security interest, the original debtor (creator of the security interest) is no longer a debtor inasmuch as it no longer has a property interest in the collateral; the buyer is the debtor. See section 9-102. As between the debtor (buyer of the collateral) and the original debtor (seller of the collateral), the debtor (buyer) normally would be entitled to the surplus following a disposition. Subsection (d) therefore requires the secured party to pay the surplus to the debtor (buyer), not to the original debtor (seller) with which it has dealt. But, because this situation typically arises as a result of the debtor's wrongful act, this article does not expose the secured party to the risk of determining ownership of the collateral. If the secured party does not know about the buyer and accordingly pays the surplus to the original debtor, the exculpatory provisions of this article exonerate the secured party from liability to the buyer. See sections 9-605 and 9-628(a) and (b). If a debtor sells collateral free of a security interest, as in a sale to a buyer in ordinary course of business (see section 9-320(a)), the property is no longer collateral and the buyer is not a debtor.

6. Certain "Low-Price" Dispositions. Subsection (f) provides a special method for calculating a deficiency or surplus when the secured party, a person related to the secured party (defined in section 9-102), or a secondary obligor acquires the collateral at a foreclosure disposition. It recognizes that when the foreclosing secured party or a related party is the transferee of the collateral, the secured party sometimes lacks the incentive to maximize the proceeds of disposition. As a consequence, the disposition may comply with the procedural requirements of this article (e.g., it is conducted in a commercially reasonable manner following reasonable notice) but nevertheless fetch a low price.

Subsection (f) adjusts for this lack of incentive. If the proceeds of a disposition of collateral to a secured party, a person related to the secured party, or a secondary obligor are "significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought," then instead of calculating a deficiency (or surplus) based on the actual net proceeds, the calculation is based upon the amount that would have been received in a commercially reasonable disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor. Subsection (f) thus rejects the view that the secured party's receipt of such a price necessarily constitutes noncompliance with part 6. However, such a price may suggest the need for greater judicial scrutiny. See section 9-610, comment 10.

7. "Person Related To." Section 9-102 defines "person related to." That term is a key element of the system provided in subsection (f) for low-price dispositions. One part of the definition applies when the secured party is an individual, and the other applies when the secured party is an organization. The definition is patterned closely on the corresponding definition in section 1.301(32) of the Uniform Consumer Credit Code.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Duty to Send Information Concerning Surplus or Deficiency. This section reflects the view that, in every consumer-goods transaction, the debtor or obligor is entitled to know the amount of a surplus or deficiency and the basis upon which the surplus or deficiency was calculated. Under subsection (b)(1), a secured party is obligated to provide this information (an "explanation," defined in subsection (a)(1)) no later than the time that it accounts for and pays a surplus or the time of its first written attempt to collect the deficiency. The obligor need not make a request for an accounting in order to receive an explanation. A secured party who does not attempt to collect a deficiency in writing or account for and pay a surplus has no obligation to send an explanation under subsection (b)(1) and, consequently, cannot be liable for noncompliance.

A debtor or secondary obligor need not wait until the secured party commences written collection efforts in order to receive an explanation of how a deficiency or surplus was calculated. Subsection (b)(1)(b) obliges the secured party to send an explanation within 14 days after it receives a "request" (defined in subsection (a)(2)).

3. Explanation of Calculation of Surplus or Deficiency. Subsection (c) contains the requirements for how a calculation of a surplus or deficiency must be explained in order to satisfy subsection (a)(1)(B). It gives a secured party some discretion concerning rebates of interest or credit service charges. The secured party may include these rebates in the aggregate amount of obligations secured, under subsection (c)(1), or may include them with other types of rebates and credits under subsection (c)(5). Rebates of interest or credit service charges are the only types of rebates for which this discretion is provided. If the secured party provides an explanation that includes rebates of precomputed interest, its explanation must so indicate. The expenses and attorney's fees to be described pursuant to subsection (c)(4) are those relating to the most recent disposition, not those that may have been incurred in connection with earlier enforcement efforts and which have been resolved by the parties.

4. Liability for Noncompliance. A secured party who fails to comply with subsection (b)(2) is liable for any loss caused plus $500. See section 9-625(b), (c), and (e)(6). A secured party who fails to send an explanation under subsection (b)(1) is liable for any loss caused plus, if the noncompliance was "part of a pattern, or consistent with a practice of noncompliance," $500. See section 9-625(b), (c), and (e)(5). However, a secured party who fails to comply with this section is not liable for statutory minimum damages under section 9-625(c)(2). See section 9-628(d).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-504(4).

2. Title Taken by Good Faith Transferee. Subsection (a) sets forth the rights acquired by persons who qualify under subsection (b) - transferees who act in good faith. Such a person is a "transferee," inasmuch as a buyer at a foreclosure sale does not meet the definition of "purchaser" in section 1-201 (the transfer is not, vis-a-vis the debtor, "voluntary"). By virtue of the expanded definition of the term "debtor" in section 9-102, subsection (a) makes clear that the ownership interest of a person who bought the collateral subject to the security interest is terminated by a subsequent disposition under this part. Such a person is a debtor under this article. Under former article 9, the result arguably was the same, but the statute was less clear. Under subsection (a), a disposition normally discharges the security interest being foreclosed and any subordinate security interests and other liens.

A disposition has the effect specified in subsection (a), even if the secured party fails to comply with this article. An aggrieved person (e.g., the holder of a subordinate security interest to whom a notification required by section 9-611 was not sent) has a right to recover any loss under section 9-625(b).

3. Unitary Standard in Public and Private Dispositions. Subsection (b) now contains a unitary standard that applies to transferees in both private and public dispositions - acting in good faith. However, this change from former section 9-504(4) should not be interpreted to mean that a transferee acts in good faith even though it has knowledge of defects or buys in collusion, standards applicable to public dispositions under the former section. Properly understood, those standards were specific examples of the absence of good faith.

4. Title Taken by Nonqualifying Transferee. Subsection (c) specifies the consequences for a transferee who does not qualify for protection under subsections (a) and (b) (i.e., a transferee who does not act in good faith). The transferee takes subject to the rights of the debtor, the enforcing secured party, and other security interests or other liens.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-504(5).

2. Scope of This Section. Under this section, assignments of secured obligations and other transactions (regardless of form) that function like assignments of secured obligations are not dispositions to which part 6 applies. Rather, they constitute assignments of rights and (occasionally) delegations of duties. Application of this section may require an investigation into the agreement of the parties, which may not be reflected in the words of the repurchase agreement (e.g., when the agreement requires a recourse party to "purchase the collateral" but contemplates that the purchaser will then conduct an article 9 foreclosure disposition).

This section, like former section 9-504(5), does not constitute a general and comprehensive rule for allocating rights and duties upon assignment of a secured obligation. Rather, it applies only in situations involving a secondary obligor described in subsection (a). In other contexts, the agreement of the parties and applicable law other than article 9 determine whether the assignment imposes upon the assignee any duty to the debtor and whether the assignor retains its duties to the debtor after the assignment.

Subsection (a)(1) applies when there has been an assignment of an obligation that is secured at the time it is assigned. Thus, if a secondary obligor acquires the collateral at a disposition under section 9-610 and simultaneously or subsequently discharges the unsecured deficiency claim, subsection (a)(1) is not implicated. Similarly, subsection (a)(3) applies only when the secondary obligor is subrogated to the secured party's rights with respect to collateral. Thus, this subsection will not be implicated if a secondary obligor discharges the debtor's unsecured obligation for a post-disposition deficiency. Similarly, if the secured party disposes of some of the collateral and the secondary obligor thereafter discharges the remaining obligation, subsection (a) applies only with respect to rights and duties concerning the remaining collateral, and, under subsection (b), the subrogation is not a disposition of the remaining collateral.

As discussed more fully in comment 3, a secondary obligor may receive a transfer of collateral in a disposition under section 9-610 in exchange for a payment that is applied against the secured obligation. However, a secondary obligor who pays and receives a transfer of collateral does not necessarily become subrogated to the rights of the secured party as contemplated by subsection (a)(3). Only to the extent the secondary obligor makes a payment in satisfaction of its secondary obligation would it become subrogated. To the extent its payment constitutes the price of the collateral in a section 9-610 disposition by the secured party, the secondary obligor would not be subrogated. Thus, if the amount paid by the secondary obligor for the collateral in a section 9-610 disposition is itself insufficient to discharge the secured obligation, but the secondary obligor makes an additional payment that satisfies the remaining balance, the secondary obligor would be subrogated to the secured party's deficiency claim. However, the duties of the secured party as such would have come to an end with respect to that collateral. In some situations the capacity in which the payment is made may be unclear. Accordingly, the parties should in their relationship provide clear evidence of the nature and circumstances of the payment by the secondary obligor.

3. Transfer of Collateral to Secondary Obligor. It is possible for a secured party to transfer collateral to a secondary obligor in a transaction that is a disposition under section 9-610 and that establishes a surplus or deficiency under section 9-615. Indeed, this article includes a special rule, in section 9-615(f), for establishing a deficiency in the case of some dispositions to, inter alia, secondary obligors. This article rejects the view, which some may have ascribed to former section 9-504(5), that a transfer of collateral to a recourse party can never constitute a disposition of collateral which discharges a security interest. Inasmuch as a secured party could itself buy collateral at its own public sale, it makes no sense to prohibit a recourse party ever from buying at the sale.

4. Timing and Scope of Obligations. Under subsection (a), a recourse party acquires rights and incurs obligations only "after" one of the specified circumstances occurs. This makes clear that when a successor assignee, transferee, or subrogee becomes obligated it does not assume any liability for earlier actions or inactions of the secured party whom it has succeeded unless it agrees to do so. Once the successor becomes obligated, however, it is responsible for complying with the secured party's duties thereafter. For example, if the successor is in possession of collateral, then it has the duties specified in section 9-207.

Under subsection (b), the same event (assignment, transfer, or subrogation) that gives rise to rights to, and imposes obligations on, a successor relieves its predecessor of any further duties under this article. For example, if the security interest is enforced after the secured obligation is assigned, the assignee - but not the assignor - has the duty to comply with this part. Similarly, the assignment does not excuse the assignor from liability for failure to comply with duties that arose before the event or impose liability on the assignee for the assignor's failure to comply.

CASE NOTES

Redemption in bankruptcy. - Repossession of the debtor's car prior to the Chapter 13 bankruptcy did not extinguish the debtor's interest in the car under §§ 8.9A-609 , 8.9A-615 , 8.9A-619 (c) , and 46.2-633, and the debtor's plan could effectuate a redemption under § 8.9A-623 by paying the creditor in full by resuming payments and paying delinquent installments within a reasonable time; thus, the creditor's motion for relief from the automatic stay under 11 U.S.C.S. § 362(d)(1) was denied. Tidewater Fin. Co. v. Moffett (In re Moffett), 288 Bankr. 721, 2002 Bankr. LEXIS 760 (Bankr. E.D. Va. 2002), aff'd, 289 Bankr. 55 (Bankr. E.D. Va. 2003).

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Transfer of Record or Legal Title. Potential buyers of collateral that is covered by a certificate of title (e.g., an automobile) or is subject to a registration system (e.g., a copyright) typically require as a condition of their purchase that the certificate or registry reflect their ownership. In many cases, this condition can be met only with the consent of the record owner. If the record owner is the debtor and, as may be the case after the default, the debtor refuses to cooperate, the secured party may have great difficulty disposing of the collateral.

Subsection (b) provides a simple mechanism for obtaining record or legal title, for use primarily when other law does not provide one. Of course, use of this mechanism will not be effective to clear title to the extent that subsection (b) is preempted by federal law. Subsection (b) contemplates a transfer of record or legal title to a third party, following a secured party's exercise of its disposition or acceptance remedies under this part, as well as a transfer by a debtor to a secured party prior to the secured party's exercise of those remedies. Under subsection (c), a transfer of record or legal title (under subsection (b) or under other law) to a secured party prior to the exercise of those remedies merely puts the secured party in a position to pass legal or record title to a transferee at foreclosure. A secured party who has obtained record or legal title retains its duties with respect to enforcement of its security interest, and the debtor retains its rights as well.

3. Title-Clearing Systems Under Other Law. Applicable non-UCC law (e.g., a certificate of title statute, federal registry rules, or the like) may provide a means by which the secured party may obtain or transfer record or legal title for the purpose of a disposition of the property under this article. The mechanism provided by this section is in addition to any title clearing provision under law other than this article.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-505.

2. Overview. This section and the two sections following deal with strict foreclosure, a procedure by which the secured party acquires the debtor's interest in the collateral without the need for a sale or other disposition under section 9-610. Although these provisions derive from former section 9-505, they have been entirely reorganized and substantially rewritten. The more straightforward approach taken in this article eliminates the fiction that the secured party always will present a "proposal" for the retention of collateral and the debtor will have a fixed period to respond. By eliminating the need (but preserving the possibility) for proceeding in that fashion, this section eliminates much of the awkwardness of former section 9-505. It reflects the belief that strict foreclosures should be encouraged and often will produce better results than a disposition for all concerned.

Subsection (a) sets forth the conditions necessary to an effective acceptance (formerly, retention) of collateral in full or partial satisfaction of the secured obligation. Section 9-621 requires in addition that a secured party who wishes to proceed under this section notify certain other persons who have or claim to have an interest in the collateral. Unlike the failure to meet the conditions in subsection (a), under section 9-622(b) the failure to comply with the notification requirement of section 9-621 does not render the acceptance of collateral ineffective. Rather, the acceptance can take effect notwithstanding the secured party's noncompliance. A person to whom the required notice was not sent has the right to recover damages under section 9-625(b). Section 9-622(a) sets forth the effect of an acceptance of collateral.

3. Conditions to Effective Acceptance. Subsection (a) contains the conditions necessary to the effectiveness of an acceptance of collateral. Subsection (a)(1) requires the debtor's consent. Under subsections (c)(1) and (c)(2), the debtor may consent by agreeing to the acceptance in writing after default. Subsection (c)(2) contains an alternative method by which to satisfy the debtor's-consent condition in subsection (a)(1). It follows the proposal-and-objection model found in former section 9-505: The debtor consents if the secured party sends a proposal to the debtor and does not receive an objection within 20 days. Under subsection (c)(1), however, that silence is not deemed to be consent with respect to acceptances in partial satisfaction. Thus, a secured party who wishes to conduct a "partial strict foreclosure" must obtain the debtor's agreement in a record authenticated after default. In all other respects, the conditions necessary to an effective partial strict foreclosure are the same as those governing acceptance of collateral in full satisfaction. (But see subsection (g), prohibiting partial strict foreclosure of a security interest in consumer transactions.)

The time when a debtor consents to a strict foreclosure is significant in several circumstances under this section and the following one. See sections 9-620(a)(1), (d)(2), 9-621(a)(1), (a)(2), and (a)(3). For purposes of determining the time of consent, a debtor's conditional consent constitutes consent.

Subsection (a)(2) contains the second condition to the effectiveness of an acceptance under this section - the absence of a timely objection from a person holding a junior interest in the collateral or from a secondary obligor. Any junior party - secured party or lienholder - is entitled to lodge an objection to a proposal, even if that person was not entitled to notification under section 9-621. Subsection (d), discussed below, indicates when an objection is timely.

Subsections (a)(3) and (a)(4) contain special rules for transactions in which consumers are involved. See comment 12.

4. Proposals. Section 9-102 defines the term "proposal." It is necessary to send a "proposal" to the debtor only if the debtor does not agree to an acceptance in an authenticated record as described in subsection (c)(1) or (c)(2). Section 9-621(a) determines whether it is necessary to send a proposal to third parties. A proposal need not take any particular form as long as it sets forth the terms under which the secured party is willing to accept collateral in satisfaction. A proposal to accept collateral should specify the amount (or a means of calculating the amount, such as by including a per diem accrual figure) of the secured obligations to be satisfied, state the conditions (if any) under which the proposal may be revoked, and describe any other applicable conditions. Note, however, that a conditional proposal generally requires the debtor's agreement in order to take effect. See subsection (c).

5. Secured Party's Agreement; No "Constructive" Strict Foreclosure. The conditions of subsection (a) relate to actual or implied consent by the debtor and any secondary obligor or holder of a junior security interest or lien. To ensure that the debtor cannot unilaterally cause an acceptance of collateral, subsection (b) provides that compliance with these conditions is necessary but not sufficient to cause an acceptance of collateral. Rather, under subsection (b), acceptance does not occur unless, in addition, the secured party consents to the acceptance in an authenticated record or sends to the debtor a proposal. For this reason, a mere delay in collection or disposition of collateral does not constitute a "constructive" strict foreclosure. Instead, delay is a factor relating to whether the secured party acted in a commercially reasonable manner for purposes of section 9-607 or 9-610. A debtor's voluntary surrender of collateral to a secured party and the secured party's acceptance of possession of the collateral does not, of itself, necessarily raise an implication that the secured party intends or is proposing to accept the collateral in satisfaction of the secured obligation under this section.

6. When Acceptance Occurs. This section does not impose any formalities or identify any steps that a secured party must take in order to accept collateral once the conditions of subsections (a) and (b) have been met. Absent facts or circumstances indicating a contrary intention, the fact that the conditions have been met provides a sufficient indication that the secured party has accepted the collateral on the terms to which the secured party has consented or proposed and the debtor has consented or failed to object. Following a proposal, acceptance of the collateral normally is automatic upon the secured party's becoming bound and the time for objection passing. As a matter of good business practice, an enforcing secured party may wish to memorialize its acceptance following a proposal, such as by notifying the debtor that the strict foreclosure is effective or by placing a written record to that effect in its files. The secured party's agreement to accept collateral is self-executing and cannot be breached. The secured party is bound by its agreement to accept collateral and by any proposal to which the debtor consents.

7. No Possession Requirement. This section eliminates the requirement in former section 9-505 that the secured party be "in possession" of collateral. It clarifies that intangible collateral, which cannot be possessed, may be subject to a strict foreclosure under this section. However, under subsection (a)(3), if the collateral is consumer goods, acceptance does not occur unless the debtor is not in possession.

8. When Objection Timely. Subsection (d) explains when an objection is timely and thus prevents an acceptance of collateral from taking effect. An objection by a person to which notification was sent under section 9-621 is effective if it is received by the secured party within 20 days from the date the notification was sent to that person. Other objecting parties (i.e., third parties who are not entitled to notification) may object at any time within 20 days after the last notification is sent under section 9-621. If no such notification is sent, third parties must object before the debtor agrees to the acceptance in writing or is deemed to have consented by silence. The former may occur any time after default, and the latter requires a 20-day waiting period. See subsection (c).

9. Applicability of Other Law. This section does not purport to regulate all aspects of the transaction by which a secured party may become the owner of collateral previously owned by the debtor. For example, a secured party's acceptance of a motor vehicle in satisfaction of secured obligations may require compliance with the applicable motor vehicle certificate of title law. State legislatures should conform those laws so that they mesh well with this section and section 9-610, and courts should construe those laws and this section harmoniously. A secured party's acceptance of collateral in the possession of the debtor also may implicate statutes dealing with a seller's retention of possession of goods sold.

10. Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes. If the collateral is accounts, chattel paper, payment intangibles, or promissory notes, then a secured party's acceptance of the collateral in satisfaction of secured obligations would constitute a sale to the secured party. That sale normally would give rise to a new security interest (the ownership interest) under sections 1-201 (37) and 9-109. In the case of accounts and chattel paper, the new security interest would remain perfected by a filing that was effective to perfect the secured party's original security interest. In the case of payment intangibles or promissory notes, the security interest would be perfected when it attaches. See section 9-309. However, the procedures for acceptance of collateral under this section satisfy all necessary formalities and a new security agreement authenticated by the debtor would not be necessary.

11. Role of Good Faith. Section 1-304 imposes an obligation of good faith on a secured party's enforcement under this article. This obligation may not be disclaimed by agreement. See section 1-302 . Thus, a proposal and acceptance made under this section in bad faith would not be effective. For example, a secured party's proposal to accept marketable securities worth $1,000 in full satisfaction of indebtedness in the amount of $100, made in the hopes that the debtor might inadvertently fail to object, would be made in bad faith. On the other hand, in the normal case proposals and acceptances should be not second guessed on the basis of the "value" of the collateral involved. Disputes about valuation or even a clear excess of collateral value over the amount of obligations satisfied do not necessarily demonstrate the absence of good faith.

12. Special Rules in Consumer Cases. Subsection (e) imposes an obligation on the secured party to dispose of consumer goods under certain circumstances. Subsection (f) explains when a disposition that is required under subsection (e) is timely. An effective acceptance of collateral cannot occur if subsection (e) requires a disposition unless the debtor waives this requirement pursuant to section 9-624(b). Moreover, a secured party who takes possession of collateral and unreasonably delays disposition violates subsection (e), if applicable, and may also violate section 9-610 or other provisions of this part. Subsection (e) eliminates as superfluous the express statutory reference to "conversion" found in former section 9-505. Remedies available under other law, including conversion, remain available under this article in appropriate cases. See sections 1-103, 1-305 .

Subsection (g) prohibits the secured party in consumer transactions from accepting collateral in partial satisfaction of the obligation it secures. If a secured party attempts an acceptance in partial satisfaction in a consumer transaction, the attempted acceptance is void.

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-505.

2. Notification Requirement. Subsection (a) specifies three classes of competing claimants to whom the secured party must send notification of its proposal: (i) Those who notify the secured party that they claim an interest in the collateral; (ii) holders of certain security interests and liens who have filed against the debtor; and (iii) holders of certain security interests who have perfected by compliance with a statute (including a certificate of title statute), regulation, or treaty described in section 9-311(a). With regard to (ii), see section 9-611, comment 4. Subsection (b) also requires notification to any secondary obligor if the proposal is for acceptance in partial satisfaction.

Unlike section 9-611, this section contains no "safe harbor," which excuses an enforcing secured party from notifying certain secured parties and other lienholders. This is because, unlike section 9-610, which requires that a disposition of collateral be commercially reasonable, section 9-620 permits the debtor and secured party to set the amount of credit the debtor will receive for the collateral subject only to the requirement of good faith. An effective acceptance discharges subordinate security interests and other subordinate liens. See section 9-622. If collateral is subject to several liens securing debts much larger than the value of the collateral, the debtor may be disinclined to refrain from consenting to an acceptance by the holder of the senior security interest, even though, had the debtor objected and the senior disposed of the collateral under section 9-610, the collateral may have yielded more than enough to satisfy the senior security interest (but not enough to satisfy all the liens). Accordingly, this section imposes upon the enforcing secured party the risk of the filing office's errors and delay. The holder of a security interest who is entitled to notification under this section but to whom the enforcing secured party does not send notification has the right to recover under section 9-625(b) any loss resulting from the secured party's noncompliance with this section.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Effect of Acceptance. Subsection (a) specifies the effect of an acceptance of collateral in full or partial satisfaction of the secured obligation. The acceptance to which it refers is an effective acceptance. If a purported acceptance is ineffective under section 9-620, e.g., because the secured party receives a timely objection from a person entitled to notification, then neither this subsection nor subsection (b) applies. Paragraph (1) expresses the fundamental consequence of accepting collateral in full or partial satisfaction of the secured obligation - the obligation is discharged to the extent consented to by the debtor. Unless otherwise agreed, the obligor remains liable for any deficiency. Paragraphs (2) through (4) indicate the effects of an acceptance on various property rights and interests. Paragraph (2) follows section 9-617(a) in providing that the secured party acquires "all of a debtor's rights in the collateral." Under paragraph (3), the effect of strict foreclosure on holders of junior security interests and other liens is the same regardless of whether the collateral is accepted in full or partial satisfaction of the secured obligation: All junior encumbrances are discharged. Paragraph (4) provides for the termination of other subordinate interests.

Subsection (b) makes clear that subordinate interests are discharged under subsection (a) regardless of whether the secured party complies with this article. Thus, subordinate interests are discharged regardless of whether a proposal was required to be sent or, if required, was sent. However, a secured party's failure to send a proposal or otherwise to comply with this article may subject the secured party to liability under section 9-625.

CASE NOTES

Redemption in bankruptcy. - Repossession of the debtor's car prior to the Chapter 13 bankruptcy did not extinguish the debtor's interest in the car under §§ 8.9A-609 , 8.9A-615 , 8.9A-619 (c) , and 46.2-633, and the debtor's plan could effectuate a redemption under § 8.9A-623 by paying the creditor in full by resuming payments and paying delinquent installments within a reasonable time; thus, the creditor's motion for relief from the automatic stay under 11 U.S.C.S. § 362(d)(1) was denied. Tidewater Fin. Co. v. Moffett (In re Moffett), 288 Bankr. 721, 2002 Bankr. LEXIS 760 (Bankr. E.D. Va. 2002), aff'd, 289 Bankr. 55 (Bankr. E.D. Va. 2003).

In affirming the bankruptcy court, the court found that appellee debtor retained rights in the vehicle until such time as the right to redeem was extinguished and not all equitable rights in the vehicle passed to appellant creditor at the time of repossession because, while it was true that contractual rights of redemption were not property interests, statutory rights of redemption were rights to exercise a form of control over the property itself under § 8.9A-623 . Tidewater Fin. Co. v. Moffett (In re Moffett), 289 Bankr. 55, 2003 U.S. Dist. LEXIS 7169 (E.D. Va. 2003), aff'd, 356 F.3d 518 (4th Cir. 2004).

Chapter 13 debtor's right to redeem a repossessed car under § 8.9A-623 created an equitable interest in the car that was properly included in the debtor's bankruptcy estate; therefore, the secured creditor was properly ordered to return the car to the debtor where the reorganization plan adequately protected the creditor's interest by requiring repayment of the debt under the same terms that were included in the parties' purchase agreement. Tidewater Fin. Co. v. Moffett (In re Moffett), 356 F.3d 518, 2004 U.S. App. LEXIS 1011 (4th Cir. 2004).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-506.

2. Redemption Right. Under this section, as under former section 9-506, the debtor or another secured party may redeem collateral as long as the secured party has not collected (section 9-607), disposed of or contracted for the disposition of (section 9-610), or accepted (section 9-620) the collateral. Although this section generally follows former section 9-506, it extends the right of redemption to holders of nonconsensual liens. To redeem the collateral a person must tender fulfillment of all obligations secured, plus certain expenses. If the entire balance of a secured obligation has been accelerated, it would be necessary to tender the entire balance. A tender of fulfillment obviously means more than a new promise to perform an existing promise. It requires payment in full of all monetary obligations then due and performance in full of all other obligations then matured. If unmatured secured obligations remain, the security interest continues to secure them (i.e., as if there had been no default).

3. Redemption of Remaining Collateral Following Partial Enforcement. Under section 9-610 a secured party may make successive dispositions of portions of its collateral. These dispositions would not affect the debtor's, another secured party's, or a lienholder's right to redeem the remaining collateral.

4. Effect of "Repledging." Section 9-207 generally permits a secured party having possession or control of collateral to create a security interest in the collateral. As explained in the comments to that section, the debtor's right (as opposed to its practical ability) to redeem collateral is not affected by, and does not affect, the priority of a security interest created by the debtor's secured party.

OFFICIAL COMMENT

Comment. - 1. Source. Former sections 9-504(3), 9-505, and 9-506.

2. Waiver. This section is a limited exception to Section 9-602, which generally prohibits waiver by debtors and obligors. It makes no provision for waiver of the rule prohibiting a secured party from buying at its own private disposition. Transactions of this kind are equivalent to "strict foreclosures" and are governed by Sections 9-620, 9-621, and 9-622.

SubPart 2. Noncompliance with Title.

CASE NOTES

The Commercial Code of Virginia imposes liability on a secured creditor who disposes of collateral without complying therewith and a debtor may recover losses due to creditor's noncompliance. Bush v. Nationsbank, 166 Bankr. 69 (Bankr. W.D. Va.), rev'd on other grounds, NationsBank v. Bush, 169 Bankr. 34 (W.D. Va. 1994).

When a consumer purchased a vehicle from a dealer, but a lender declined to provide financing for the sale, after which the dealer repossessed the vehicle, the consumer was entitled to the remedies in subsection (c) of § 8.9A-625 because: (1) the consumer was a "debtor," under subdivision (a)(28)(A) of § 8.9A-102 ; (2) while the dealer had the right to repossess the vehicle when financing fell through, pursuant to the parties' contract, the dealer had a duty, under §§ 8.9A-611 through 8.9A-614 , to give the consumer notice before disposing of the vehicle, since the parties did not waive this requirement and the consumer retained an interest in the car; and (3) the dealer did not provide notice. Cappo Mgmt. v. V Britt, 282 Va. 33 , 711 S.E.2d 209, 2011 Va. LEXIS 124 (2011).

The Uniform Commercial Code imposes liability on a secured creditor who disposes of collateral without complying with the law. In re Bishop, 482 F.2d 381 (4th Cir. 1973).

It is silent, however, about the creditor's right to recover a deficiency, and courts have not ruled uniformly on this issue. In re Bishop, 482 F.2d 381 (4th Cir. 1973).

In such cases, credit must equal market value at lawful sale. - Courts that allow a secured creditor to recover a deficiency although he has not fully complied with the law hold that the debt is not to be credited merely with the proceeds of sale; instead, the debtor must be credited with the amount that reasonably should have been obtained through a lawful sale - that is, the credit must be equivalent to the market value. In re Bishop, 482 F.2d 381 (4th Cir. 1973).

"Debtor" includes owner of collateral and obligor. - The context in which the term "debtor" is employed in former § 8.9-504 (3) requires that the term be interpreted to include both the owner of the collateral and the obligor, if they are not the same person and includes a comaker or guarantor of the obligation. Rhoten v. United Va. Bank, 221 Va. 222 , 269 S.E.2d 781 (1980).

Bank provided proper notice. - Bankruptcy court's finding that bank violated the Virginia Commercial Code by failing to provide proper notice of the sale was clearly erroneous where notice letter, which was entered into evidence at the hearing, contained debtor's correct address. NationsBank v. Bush, 169 Bankr. 34 (W.D. Va. 1994).

Determination of commercial reasonableness. - The determination of commercial reasonableness need not always be a question of fact. Chrysler Credit Corp. v. Curley, 753 F. Supp. 611 (E.D. Va. 1990).

Price differential does not establish bad faith, abusive or grossly negligent conduct in collateral dispositions. Chrysler Credit Corp. v. Curley, 753 F. Supp. 611 (E.D. Va. 1990).

Burden of proving market value is less than balance due. - A creditor who has not complied with the law has the burden of proving by other evidence that the market value is less than the balance due. In re Bishop, 482 F.2d 381 (4th Cir. 1973).

CIRCUIT COURT OPINIONS

Failure to show reasonableness of repossession fee. - Where a car seller failed to prove that a repossession fee charged to the car buyers was reasonable, the car buyers were entitled to damages equal to the finance charge and 10% of the principal. Nat'l Auto Sales v. Butler, 58 Va. Cir. 185, 2002 Va. Cir. LEXIS 140 (Richmond 2002).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-507.

2. Remedies for Noncompliance; Scope. Subsections (a) and (b) provide the basic remedies afforded to those aggrieved by a secured party's failure to comply with this article. Like all provisions that create liability, they are subject to section 9-628, which should be read in conjunction with section 9-605. The principal limitations under this part on a secured party's right to enforce its security interest against collateral are the requirements that it proceed in good faith (section 1-203 ), in a commercially reasonable manner (sections 9-607 and 9-610), and, in most cases, with reasonable notification (sections 9-611 through 9-614). Following former section 9-507, under subsection (a) an aggrieved person may seek injunctive relief, and under subsection (b) the person may recover damages for losses caused by noncompliance. Unlike former section 9-507, however, subsections (a) and (b) are not limited to noncompliance with provisions of this part of article 9. Rather, they apply to noncompliance with any provision of this article. The change makes this section applicable to noncompliance with sections 9-207 (duties of secured party in possession of collateral), 9-208 (duties of secured party having control over deposit account), 9-209 (duties of secured party if account debtor has been notified of an assignment), 9-210 (duty to comply with request for accounting, etc.), 9-509(a) (duty to refrain from filing unauthorized financing statement), and 9-513(a) (duty to provide termination statement). Subsection (a) also modifies the first sentence of former section 9-507(1) by adding the references to "collection" and "enforcement." Subsection (c)(2), which gives a minimum damage recovery in consumer goods transactions, applies only to noncompliance with the provisions of this part.

3. Damages for Noncompliance with This Article. Subsection (b) sets forth the basic remedy for failure to comply with the requirements of this article: A damage recovery in the amount of loss caused by the noncompliance. Subsection (c) identifies who may recover under subsection (b). It affords a remedy to any aggrieved person who is a debtor or obligor. However, a principal obligor who is not a debtor may recover damages only for noncompliance with section 9-616, inasmuch as none of the other rights and duties in this article run in favor of such a principal obligor. Such a principal obligor could not suffer any loss or damage on account of noncompliance with rights or duties of which it is not a beneficiary. Subsection (c) also affords a remedy to an aggrieved person who holds a competing security interest or other lien, regardless of whether the aggrieved person is entitled to notification under part 6. The remedy is available even to holders of senior security interests and other liens. The exercise of this remedy is subject to the normal rules of pleading and proof. A person who has delegated the duties of a secured party but who remains obligated to perform them is liable under this subsection. The last sentence of subsection (d) eliminates the possibility of double recovery or other over-compensation arising out of a reduction or elimination of a deficiency under section 9-626, based on noncompliance with the provisions of this part relating to collection, enforcement, disposition, or acceptance. Assuming no double recovery, a debtor whose deficiency is eliminated under section 9-626 may pursue a claim for a surplus. Because section 9-626 does not apply to consumer transactions, the statute is silent as to whether a double recovery or other over-compensation is possible in a consumer transaction.

Damages for violation of the requirements of this article, including section 9-609, are those reasonably calculated to put an eligible claimant in the position that it would have occupied had no violation occurred. See section 1-106. Subsection (b) supports the recovery of actual damages for committing a breach of the peace in violation of section 9-609, and principles of tort law supplement this subsection. See section 1-103. However, to the extent that damages in tort compensate the debtor for the same loss dealt with by this article, the debtor should be entitled to only one recovery.

4. Minimum Damages in Consumer-Goods Transactions. Subsection (c)(2) provides a minimum, statutory, damage recovery for a debtor and secondary obligor in a consumer-goods transaction. It is patterned on former section 9-507(1) and is designed to ensure that every noncompliance with the requirements of part 6 in a consumer goods transaction results in liability, regardless of any injury that may have resulted. Subsection (c)(2) leaves the treatment of statutory damages as it was under former article 9. A secured party is not liable for statutory damages under this subsection more than once with respect to any one secured obligation (see section 9-628(e)), nor is a secured party liable under this subsection for failure to comply with section 9-616 (see section 9-628(d)).

Following former section 9-507(1), this article does not include a definition or explanation of the terms "credit service charge," "principal amount," "time-price differential," or "cash price," as used in subsection (c)(2). It leaves their construction and application to the court, taking into account the subsection's purpose of providing a minimum recovery in consumer-goods transactions.

5. Supplemental Damages. Subsections (e) and (f) provide damages that supplement the recovery, if any, under subsection (b). Subsection (e) imposes an additional $500 liability upon a person who fails to comply with the provisions specified in that subsection, and subsection (f) imposes like damages on a person who, without reasonable excuse, fails to comply with a request for an accounting or a request regarding a list of collateral or statement of account under section 9-210. However, under subsection (f), a person has a reasonable excuse for the failure if the person never claimed an interest in the collateral or obligations that were the subject of the request.

6. Estoppel. Subsection (g) limits the extent to which a secured party who fails to comply with a request regarding a list of collateral or statement of account may claim a security interest.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Scope. The basic damage remedy under section 9-625(b) is subject to the special rules in this section for transactions other than consumer transactions. This section addresses situations in which the amount of a deficiency or surplus is in issue, i.e., situations in which the secured party has collected, enforced, disposed of, or accepted the collateral. It contains special rules applicable to a determination of the amount of a deficiency or surplus. Because this section affects a person's liability for a deficiency, it is subject to section 9-628, which should be read in conjunction with section 9-605. The rules in this section apply only to noncompliance in connection with the "collection, enforcement, disposition, or acceptance" under part 6. For other types of noncompliance with part 6, the general liability rule of section 9-625(b) - recovery of actual damages - applies. Consider, for example, a repossession that does not comply with section 9-609 for want of a default. The debtor's remedy is under section 9-625(b). In a proper case, the secured party also may be liable for conversion under non-UCC law. If the secured party thereafter disposed of the collateral, however, it would violate section 9-610 at that time, and this section would apply.

3. Rebuttable Presumption Rule. Section 9-626 establishes the rebuttable presumption rule for transactions other than consumer transactions. Under paragraph (1), the secured party need not prove compliance with the relevant provisions of this part as part of its prima facie case. If, however, the debtor or a secondary obligor raises the issue (in accordance with the forum's rules of pleading and practice), then the secured party bears the burden of proving that the collection, enforcement, disposition, or acceptance complied. In the event the secured party is unable to meet this burden, then paragraph (3) explains how to calculate the deficiency. Under this rebuttable presumption rule, the debtor or obligor is to be credited with the greater of the actual proceeds of the disposition or the proceeds that would have been realized had the secured party complied with the relevant provisions. If a deficiency remains, then the secured party is entitled to recover it. The references to "the secured obligation, expenses, and attorney's fees" in paragraphs (3) and (4) embrace the application rules in sections 9-608(a) and 9-615(a).

Unless the secured party proves that compliance with the relevant provisions would have yielded a smaller amount, under paragraph (4) the amount that a complying collection, enforcement, or disposition would have yielded is deemed to be equal to the amount of the secured obligation, together with expenses and attorney's fees. Thus, the secured party may not recover any deficiency unless it meets this burden.

4. Consumer Transactions. Although section 9-626 adopts a version of the rebuttable presumption rule for transactions other than consumer transactions, with certain exceptions part 6 does not specify the effect of a secured party's noncompliance in consumer transactions. (The exceptions are the provisions for the recovery of damages in section 9-625.) Subsection (b) provides that the limitation of subsection (a) (section 9-626) to transactions other than consumer transactions is intended to leave to the court the determination of the proper rules in consumer transactions. It also instructs the court not to draw any inference from the limitation as to the proper rules for consumer transactions and leaves the court free to continue to apply established approaches to those transactions.

Courts construing former section 9-507 disagreed about the consequences of a secured party's failure to comply with the requirements of former part 5. Three general approaches emerged. Some courts have held that a noncomplying secured party may not recover a deficiency (the "absolute bar" rule). A few courts held that the debtor can offset against a claim to a deficiency all damages recoverable under former section 9-507 resulting from the secured party's noncompliance (the "offset" rule). A plurality of courts considering the issue held that the noncomplying secured party is barred from recovering a deficiency unless it overcomes a rebuttable presumption that compliance with former part 5 would have yielded an amount sufficient to satisfy the secured debt. In addition to the nonuniformity resulting from court decisions, some states enacted special rules governing the availability of deficiencies.

5. Burden of Proof When Section 9-615(f) Applies. In a non-consumer transaction, paragraph (5) imposes upon a debtor or obligor the burden of proving that the proceeds of a disposition are so low that, under section 9-615(f), the actual proceeds should not serve as the basis upon which a deficiency or surplus is calculated. Were the burden placed on the secured party, then debtors might be encouraged to challenge the price received in every disposition to the secured party, a person related to the secured party, or a secondary obligor.

6. Delay in Applying This Section. There is an inevitable delay between the time a secured party engages in a noncomplying collection, enforcement, disposition, or acceptance and the time of a subsequent judicial determination that the secured party did not comply with part 6. During the interim, the secured party, believing that the secured obligation is larger than it ultimately is determined to be, may continue to enforce its security interest in collateral. If some or all of the secured indebtedness ultimately is discharged under this section, a reasonable application of this section would impose liability on the secured party for the amount of any excess, unwarranted recoveries but would not make the enforcement efforts wrongful.

CASE NOTES

Where the only proof of market value was the amount the collateral brought at sales that were neither lawful nor commercially reasonable, this proof is insufficient, as a matter of law, to secure a deficiency judgment. In re Bishop, 482 F.2d 381 (4th Cir. 1973) (decided under prior law).

OFFICIAL COMMENT

Comment. - 1. Source. Former section 9-507(2).

2. Relationship of Price to Commercial Reasonableness. Some observers have found the notion contained in subsection (a) (derived from former section 9-507(2)) (the fact that a better price could have been obtained does not establish lack of commercial reasonableness) to be inconsistent with that found in section 9-610(b) (derived from former section 9-504(3)) (every aspect of the disposition, including its terms, must be commercially reasonable). There is no such inconsistency. While not itself sufficient to establish a violation of this part, a low price suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable.

The law long has grappled with the problem of dispositions of personal and real property which comply with applicable procedural requirements (e.g., advertising, notification to interested persons, etc.) but which yield a price that seems low. This article addresses that issue in section 9-615(f). That section applies only when the transferee is the secured party, a person related to the secured party, or a secondary obligor. It contains a special rule for calculating a deficiency or surplus in a complying disposition that yields a price that is "significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought."

3. Determination of Commercial Reasonableness; Advance Approval. It is important to make clear the conduct and procedures that are commercially reasonable and to provide a secured party with the means of obtaining, by court order or negotiation with a creditors' committee or a representative of creditors, advance approval of a proposed method of enforcement as commercially reasonable. This section contains rules that assist in that determination and provides for advance approval in appropriate situations. However, none of the specific methods of disposition specified in subsection (b) is required or exclusive.

4. "Recognized Market." As in sections 9-610(c) and 9-611(d), the concept of a "recognized market" in subsections (b)(1) and (2) is quite limited; it applies only to markets in which there are standardized price quotations for property that is essentially fungible, such as stock exchanges.

OFFICIAL COMMENT

Comment. - 1. Source. New.

2. Exculpatory Provisions. Subsections (a), (b), and (c) contain exculpatory provisions that should be read in conjunction with section 9-605. Without this group of provisions, a secured party could incur liability to unknown persons and under circumstances that would not allow the secured party to protect itself. The broadened definition of the term "debtor" underscores the need for these provisions.

If a secured party reasonably, but mistakenly, believes that a consumer transaction or consumer-goods transaction is a nonconsumer transaction or nonconsumer-goods transaction, and if the secured party's belief is based on its reasonable reliance on a representation of the type specified in subsection (c)(1) or (c)(2), then this article should be applied as if the facts reasonably believed and the representation reasonably relied upon were true. For example, if a secured party reasonably believed that a transaction was a nonconsumer transaction and its belief was based on reasonable reliance on the debtor's representation that the collateral secured an obligation incurred for business purposes, the secured party is not liable to any person, and the debtor's liability for a deficiency is not affected, because of any act or omission of the secured party which arises out of the reasonable belief. Of course, if the secured party's belief is not reasonable or, even if reasonable, is not based on reasonable reliance on the debtor's representation, this limitation on liability is inapplicable.

3. Inapplicability of Statutory Damages to Section 9-616. Subsection (d) excludes noncompliance with section 9-616 entirely from the scope of statutory damage liability under section 9-625(c)(2).

4. Single Liability for Statutory Minimum Damages. Subsection (e) ensures that a secured party will incur statutory damages only once in connection with any one secured obligation.

OFFICIAL COMMENT

Comment. - A uniform law as complex as article 9 necessarily gives rise to difficult problems and uncertainties during the transition to the new law. As is customary for uniform laws, this article is based on the general assumption that all states will have enacted substantially identical versions. While always important, uniformity is essential to the success of this article. If former article 9 is in effect in some jurisdictions, and this article is in effect in others, horrendous complications may arise. For example, the proper place in which to file to perfect a security interest (and thus the status of a particular security interest as perfected or unperfected) would depend on whether the matter was litigated in a state in which former article 9 was in effect or a state in which this article was in effect. Accordingly, this section contemplates that states will adopt a uniform effective date for this article. Any one state's failure to adopt the uniform effective date will greatly increase the cost and uncertainty surrounding the transition.

Other problems arise from transactions and relationships that were entered into under former article 9 or under non-UCC law and which remain outstanding on the effective date of this article. The difficulties arise primarily because this article expands the scope of former article 9 to cover additional types of collateral and transactions and because it provides new methods of perfection for some types of collateral, different priority rules, and different choice of law rules governing perfection and priority. This section and the other sections in this part address primarily this second set of problems.

OFFICIAL COMMENT

Comment. - 1. Pre-Effective-Date Transactions. Subsection (a) contains the general rule that this article applies to transactions, security interests, and other liens within its scope (see section 9-109), even if the transaction or lien was entered into or created before the effective date. Thus, secured transactions entered into under former article 9 must be terminated, completed, consummated, and enforced under this article. Subsection (b) is an exception to the general rule. It applies to valid, pre-effective-date transactions and liens that were not governed by former article 9 but would be governed by this article if they had been entered into or created after this Article takes effect. Under subsection (b), these valid transactions, such as the creation of agricultural liens and security interests in commercial tort claims, retain their validity under this article and may be terminated, completed, consummated, and enforced under this article. However, these transactions also may be terminated, completed, consummated, and enforced by the law that otherwise would apply had this article not taken effect.

2. Judicial Proceedings Commenced Before Effective Date. As is usual in transition provisions, subsection (c) provides that this article does not affect litigation pending on the effective date.

OFFICIAL COMMENT

Comment. - 1. Perfected Security Interests Under Former Article 9 and This Article. This section deals with security interests that are perfected (i.e., that are enforceable and have priority over the rights of a lien creditor) under former article 9 or other applicable law immediately before this article takes effect. Subsection (a) provides, not surprisingly, that if the security interest would be a perfected security interest under this article (i.e., if the transaction satisfies this article's requirements for enforceability (attachment) and perfection), no further action need be taken for the security interest to be a perfected security interest.

2. Security Interests Enforceable and Perfected Under Former Article 9 but Unenforceable or Unperfected Under This Article. Subsection (b) deals with security interests that are enforceable and perfected under former article 9 or other applicable law immediately before this Article takes effect but do not satisfy the requirements for enforceability (attachment) or perfection under this article. Except as otherwise provided in section 9-705, these security interests are perfected security interests for one year after the effective date. If the security interest satisfies the requirements for attachment and perfection within that period, the security interest remains perfected thereafter. If the security interest satisfies only the requirements for attachment within that period, the security interest becomes unperfected at the end of the one-year period.

Example 1: A pre-effective-date security agreement in a consumer transaction covers "all securities accounts." The security interest is properly perfected. The collateral description was adequate under former article 9 (see former section 9-115(3)) but is insufficient under this article (see section 9-108(e)(2)). Unless the debtor authenticates a new security agreement describing the collateral other than by "type" (or section 9-203(b)(3) otherwise is satisfied) within the one-year period following the effective date, the security interest becomes unenforceable at the end of that period.

Other examples under former article 9 or other applicable law that may be effective as attachment or enforceability steps but may be ineffective under this article include an oral agreement to sell a payment intangible or possession by virtue of a notification to a bailee under former section 9-305. Neither the oral agreement nor the notification would satisfy the revised section 9-203 requirements for attachment.

Example 2: A pre-effective-date possessory security interest in instruments is perfected by a bailee's receipt of notification under former section 9-305. The bailee has not, however, acknowledged that it holds for the secured party's benefit under revised section 9-313. Unless the bailee authenticates a record acknowledging that it holds for the secured party (or another appropriate perfection step is taken) within the one-year period following the effective date, the security interest becomes unperfected at the end of that period.

3. Interpretation of Pre-Effective-Date Security Agreements. Section 9-102 defines "security agreement" as "an agreement that creates or provides for a security interest." Under section 1-201(3), an "agreement" is a "bargain of the parties in fact." If parties to a pre-effective-date security agreement describe the collateral by using a term defined in former article 9 in one way and defined in this article in another way, in most cases it should be presumed that the bargain of the parties contemplated the meaning of the term under former article 9.

Example 3: A pre-effective-date security agreement covers "all accounts" of a debtor. As defined under former article 9, an "account" did not include a right to payment for lottery winnings. These rights to payment are "accounts" under this article, however. The agreement of the parties presumptively created a security interest in "accounts" as defined in former article 9. A different result might be appropriate, for example, if the security agreement explicitly contemplated future changes in the article 9 definitions of types of collateral - e.g., "'Accounts' means 'accounts' as defined in the UCC article 9 of (State X), as that definition may be amended from time to time." Whether a different approach is appropriate in any given case depends on the bargain of the parties, as determined by applying ordinary principles of contract construction.

OFFICIAL COMMENT

Comment. - This section deals with security interests that are enforceable but unperfected (i.e., subordinate to the rights of a person who becomes a lien creditor) under former article 9 or other applicable law immediately before this Article takes effect. These security interests remain enforceable for one year after the effective date, and thereafter if the appropriate steps for attachment under this article are taken before the one-year period expires. (This section's treatment of enforceability is the same as that of section 9-703.) The security interest becomes a perfected security interest on the effective date if, at that time, the security interest satisfies the requirements for perfection under this article. If the security interest does not satisfy the requirements for perfection until sometime thereafter, it becomes a perfected security interest at that later time.

Example: A security interest has attached under former article 9 but is unperfected because the filed financing statement covers "all of debtor's personal property" and controlling case law in the applicable jurisdiction has determined that this identification of collateral in a financing statement is insufficient. Upon the effective date of this Article, the financing statement becomes sufficient under section 9-504(2). On that date the security interest becomes perfected. (This assumes, of course, that the financing statement is filed in the proper filing office under this article.)

OFFICIAL COMMENT

Comment. - 1. General. This section addresses primarily the situation in which the perfection step is taken under former article 9 or other applicable law before the effective date of this Article, but the security interest does not attach until after that date.

2. Perfection Other Than by Filing. Subsection (a) applies when the perfection step is a step other than the filing of a financing statement. If the step that would be a valid perfection step under former article 9 or other law is taken before this Article takes effect, and if a security interest attaches within one year after this Article takes effect, then the security interest becomes a perfected security interest upon attachment. However, the security interest becomes unperfected one year after the effective date unless the requirements for attachment and perfection under this article are satisfied within that period.

3. Perfection by Filing: Ineffective Filings Made Effective. Subsection (b) deals with financing statements that were filed under former article 9 and which would not have perfected a security interest under the former article (because, e.g., they did not accurately describe the collateral or were filed in the wrong place), but which would perfect a security interest under this article. Under subsection (b), such a financing statement is effective to perfect a security interest to the extent it complies with this article. Subsection (b) applies regardless of the reason for the filing. For example, a secured party need not wait until the effective date to respond to the change this article makes with respect to the jurisdiction whose law governs perfection of certain security interests. Rather, a secured party may wish to prepare for this change by filing a financing statement before the effective date in the jurisdiction whose law governs perfection under this article. When this Article takes effect, the filing becomes effective to perfect a security interest (assuming the filing satisfies the perfection requirements of this article). Note, however, that section 9-706 determines whether a financing statement filed before the effective date operates to continue the effectiveness of a financing statement filed in another office before the effective date.

4. Perfection by Filing: Change in Applicable Law or Filing Office. Subsection (c) provides that a financing statement filed in the proper jurisdiction under former section 9-103 remains effective for all purposes, despite the fact that this article would require filing of a financing statement in a different jurisdiction or in a different office in the same jurisdiction. This means that, during the early years of this article's effectiveness, it may be necessary to search not only in the filing office of the jurisdiction whose law governs perfection under this article but also (if different) in the jurisdiction(s) and filing office(s) designated by former article 9. To limit this burden, subsection (c) provides that a financing statement filed in the jurisdiction determined by former section 9-103 becomes ineffective at the earlier of the time it would become ineffective under the law of that jurisdiction or June 30, 2006. The June 30, 2006, limitation addresses some nonuniform versions of former article 9 that extended the effectiveness of a financing statement beyond five years. Note that a financing statement filed before the effective date may remain effective beyond June 30, 2006, if subsection (d) (concerning continuation statements) or (e) (concerning transmitting utilities) or section 9-706 (concerning initial financing statements that operate to continue pre-effective-date financing statements) so provides.

Subsection (c) is an exception to section 9-703(b). Under the general rule in section 9-703(b), a security interest that is enforceable and perfected on the effective date of this Article is a perfected security interest for one year after this article takes effect, even if the security interest is not enforceable under this article and the applicable requirements for perfection under this article have not been met. However, in some cases subsection (c) may shorten the one-year period of perfection; in others, if the security interest is enforceable under section 9-203, it may extend the period of perfection.

Example 1: On July 3, 1996, D, a State X corporation, creates a security interest in certain manufacturing equipment located in State Y. On July 6, 1996, SP perfects a security interest in the equipment under former article 9 by filing in the office of the State Y Secretary of State. See former section 9-103(1)(b). This article takes effect in States X and Y on July 1, 2001. Under section 9-705(c), the financing statement remains effective until it lapses in July 2001. See former section 9-403. Had SP continued the effectiveness of the financing statement by filing a continuation statement in State Y under former article 9 before July 1, 2001, the financing statement would have remained effective to perfect the security interest through June 30, 2006. See subsection (c)(2). Alternatively, SP could have filed an initial financing statement in State X under subsection (b) or section 9-706 before the State Y financing statement lapsed. Had SP done so, the security interest would have remained perfected without interruption until the State X financing statement lapsed.

5. Continuing Effectiveness of Filed Financing Statement. A financing statement filed before the effective date of this Article may be continued only by filing in the state and office designated by this article. This result is accomplished in the following manner: Subsection (d) indicates that, as a general matter, a continuation statement filed after the effective date of this Article does not continue the effectiveness of a financing statement filed under the law designated by former section 9-103. Instead, an initial financing statement must be filed under section 9-706. The second sentence of subsection (d) contains an exception to the general rule. It provides that a continuation statement is effective to continue the effectiveness of a financing statement filed before this Article takes effect if this article prescribes not only the same jurisdiction but also the same filing office.

Example 2: On November 8, 2000, D, a State X corporation, creates a security interest in certain manufacturing equipment located in State Y. On November 15, 2000, SP perfects a security interest in the equipment under former article 9 by filing in the office of the State Y Secretary of State. See former section 9-103(1)(b). This article takes effect in States X and Y on July 1, 2001. Under section 9-705(c), the financing statement ceases to be effective in November, 2005, when it lapses. See section 9-515. Under this article, the law of D's location (State X, see section 9-307) governs perfection. See section 9-301. Thus, the filing of a continuation statement in State Y on or after July 1, 2001, would not continue the effectiveness of the financing statement. See subsection (d). However, the effectiveness of the financing statement could be continued under section 9-706.

Example 3: The facts are as in Example 2, except that D is a State Y corporation. Assume State Y adopted former section 9-401(1) (second alternative). State Y law governs perfection under part 3 of this article. (See sections 9-301 and 9-307.) Under the second sentence of subsection (d), the timely filing of a continuation statement in accordance with the law of State Y continues the effectiveness of the financing statement.

Example 4: The facts are as in Example 3, except that the collateral is equipment used in farming operations and, in accordance with former section 9-401(1) (second alternative) as enacted in State Y, the financing statement was filed in State Y, in the office of the Shelby County Recorder of Deeds. Under this article, a continuation statement must be filed in the office of the State Y Secretary of State. See section 9-501(a)(2). Under the second sentence of subsection (d), the timely filing of a continuation statement in accordance with the law of State Y operates to continue a pre-effective-date financing statement only if the continuation statement is filed in the same office as the financing statement. Accordingly, the continuation statement is not effective in this case, but the financing statement may be continued under section 9-706.

Example 5: The facts are as in Example 3, except that State Y enacted former section 9-401(1) (third alternative). As required by former section 9-401(1), SP filed financing statements in both the office of the State Y Secretary of State and the office of the Shelby County Recorder of Deeds. Under this article, a continuation statement must be filed in the office of the State Y Secretary of State. See section 9-501(a)(2). The timely filing of a continuation statement in that office after this Article takes effect would be effective to continue the effectiveness of the financing statement (and thus continue the perfection of the security interest), even if the financing statement filed with the county recorder lapses.

6. Continuation Statements. In some cases, this article reclassifies collateral covered by a financing statement filed under former article 9. For example, collateral consisting of the right to payment for real property sold would be a "general intangible" under the former article but an "account" under this article. To continue perfection under those circumstances, a continuation statement must comply with the normal requirements for a continuation statement. See section 9-515. In addition, the pre-effective-date financing statement and continuation statement, taken together, must satisfy the requirements of this article concerning the sufficiency of the debtor's name, secured party's name, and indication of collateral. See subsection (f).

Example 6: A pre-effective-date financing statement covers "all general intangibles" of a debtor. As defined under former article 9, a "general intangible," would include rights to payment for lottery winnings. These rights to payment are "accounts" under this article, however. A post-effective-date continuation statement will not continue the effectiveness of the pre-effective-date financing statement with respect to lottery winnings unless it amends the indication of collateral covered to include lottery winnings (e.g., by adding "accounts," "rights to payment for lottery winnings," or the like). If the continuation statement does not amend the indication of collateral, the continuation statement will be effective to continue the effectiveness of the financing statement only with respect to "general intangibles" as defined in this article.

Example 7: The facts are as in Example 6, except that the pre-effective-date financing statement covers "all accounts and general intangibles." Even though rights to payment for lottery winnings are "general intangibles" under former Article 9 and "accounts" under this Article, a post-effective-date continuation statement would continue the effectiveness of the pre-effective-date financing statement with respect to lottery winnings. There would be no need to amend the indication of collateral covered, inasmuch as the indication ("accounts") satisfies the requirements of this article.

OFFICIAL COMMENT

Comment. - 1. Continuation of Financing Statements Not Filed in Proper Filing Office Under This Article. This section deals with continuing the effectiveness of financing statements that are filed in the proper state and office under former article 9, but which would be filed in the wrong state or in the wrong office of the proper state under this article. Section 9-705(d) provides that, under these circumstances, filing a continuation statement after the effective date of this article in the office designated by former article 9 would not be effective. This section provides the means by which the effectiveness of such a financing statement can be continued if this article governs perfection under the applicable choice of law rule: Filing an initial financing statement in the office specified by section 9-501.

Although it has the effect of continuing the effectiveness of a pre-effective-date financing statement, an initial financing statement described in this section is not a continuation statement. Rather, it is governed by the rules applicable to initial financing statements. (However, the debtor need not authorize the filing. See section 9-707.) Unlike a continuation statement, the initial financing statement described in this section may be filed any time during the effectiveness of the pre-effective-date financing statement - even before this article is enacted - and not only within the six months immediately prior to lapse. In contrast to a continuation statement, which extends the lapse date of a filed financing statement for five years, the initial financing statement has its own lapse date, which bears no relation to the lapse date of the pre-effective-date financing statement whose effectiveness the initial financing statement continues. See subsection (b).

As subsection (a) makes clear, the filing of an initial financing statement under this section continues the effectiveness of a pre-effective-date financing statement. If the effectiveness of a pre-effective-date financing statement lapses before the initial financing statement is filed, the effectiveness of the pre-effective-date financing statement cannot be continued. Rather, unless the security interest is perfected otherwise, there will be a period during which the security interest is unperfected before becoming perfected again by the filing of the initial financing statement under this section.

If an initial financing statement is filed under this section before the effective date of this Article, it takes effect when this Article takes effect (assuming that it is ineffective under former article 9). Note, however, that former article 9 determines whether the filing office is obligated to accept such an initial financing statement. For the reason given in the preceding paragraph, an initial financing statement filed before the effective date of this Article does not continue the effectiveness of a pre-effective-date financing statement unless the latter remains effective on the effective date of this Article. Thus, for example, if the effectiveness of the pre-effective-date financing statement lapses before this Article takes effect, the initial financing statement would not continue its effectiveness.

2. Requirements of Initial Financing Statement Filed in Lieu of Continuation Statement. Subsection (c) sets forth the requirements for the initial financing statement under subsection (a). These requirements are needed to inform searchers that the initial financing statement operates to continue a financing statement filed elsewhere and to enable searchers to locate and discover the attributes of the other financing statement. The notice-filing policy of this Article applies to the initial financing statements described in this section. Accordingly, an initial financing statement that substantially satisfies the requirements of subsection (c) is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. See Section 9-506.

A single initial financing statement may continue the effectiveness of more than one financing statement filed before this Article's effective date. See Section 1-106 (words in the singular include the plural). If a financing statement has been filed in more than one office in a given jurisdiction, as may be the case if the jurisdiction had adopted former Section 9-401(1), third alternative, then an identification of the filing in the central filing office suffices for purposes of subsection (c)(2). If under this article the collateral is of a type different from its type under former Article 9 - as would be the case, e.g., with a right to payment of lottery winnings (a "general intangible" under former Article 9 and an "account" under this Article), then subsection (c) requires that the initial financing statement indicate the type under this Article.

OFFICIAL COMMENT

Comment. - 1. Scope of This Section. This section addresses post-effective-date amendments to pre-effective date financing statements.

2. Applicable Law. Determining how to amend a pre-effective-date financing statement requires one first to determine the jurisdiction whose law applies. Subsection (b) provides that, as a general matter, post-effective-date amendments to pre-effective-date financing statements are effective only if they are accomplished in accordance with the substantive (or local) law of the jurisdiction governing perfection under Part 3 of this Article. However, under certain circumstances, the effectiveness of a financing statement may be terminated in accordance with the substantive law of the jurisdiction in which the financing statement if filed. See Comment 5, below.

Example 1: D is a corporation organized under the law of State Y. It owns equipment located in State X. Under former Article 9, SP properly perfected a security interest in the equipment by filing a financing statement in State X. Under this Article, the law of State Y governs perfection of the security interest. See Sections 9-301, 9-307. After this Article takes effect, SP wishes to amend the financing statement to reflect a change in D's name. Under subsection (b), the financing statement may be amended in accordance with the law of State Y, i.e., in accordance with subsection (c) as enacted in State Y.

Example 2. The facts are as in Example 1, except that SP wishes to terminate the effectiveness of the State X filing. The first sentence of subsection (b) provides that the financing statement may be terminated after the effective date of this Article in accordance with the law of State Y, i.e., in accordance with subsection (c) as enacted in State Y. However, the second sentence provides that the financing statement also may be terminated in accordance with the law of the jurisdiction in which it is filed, i.e., in accordance with subsection (e) as enacted in State X. If the pre-effective-date financing statement is filed in the jurisdiction whose law governs perfection (here, State Y), then both sentences would designate the law of State Y as applicable to the termination of the financing statement. That is, the financing statement could be terminated in accordance with subsection (c) or (e) as enacted in State Y.

3. Method of Amending. Subsection (c) provides three methods of effectuating a post-effective-date amendment to a pre-effective-date financing statement. Under subsection (c)(1), if the financing statement is filed in the jurisdiction and office determined by this Article, then an effective amendment may be filed in the same office.

Example 3. D is a corporation organized under the law of State Z. It owns equipment located in State Z. Before the effective date of this Article, SP perfected a security interest in the equipment by filing in two offices in State Z, a local filing office and the office of the Secretary of State. See former Section 9-401(1) (third alternative). State Z enacts this Article and specifies in Section 9-501 that a financing statement covering equipment is to be filed in the office of the Secretary of State. SP wishes to assign its power as secured party of record. Under subsection (b), the substantive law of State Z applies. Because the pre-effective-date financing statement is filed in the office specified in subsection (c)(1) as enacted by State Z. SP may effectuate the assignment by filing an amendment under Section 9-514 with the office of the Secretary of State. SP need not amend the local filing, and the priority of the security interest perfected by the filing of the financing statement would not be affected by the failure to amend the local filing.

If a pre-effective-date financing statement is filed in an office other than the one specified by Section 9-501 of the relevant jurisdiction, then ordinarily an amendment filed in that office is ineffective. (Subsection (e) provides an exception for termination statements.) Rather, the amendment must be effectuated by a filing in the jurisdiction and office determined by this Article. That filing may consist of an initial financing statement followed by an amendment, an initial financing statement together with an amendment, or an initial financing statement that indicates the information provided in the financing statement, as amended. Subsection (c)(2) encompasses the first two options; subsection (c)(3) contemplates the last. In each instance, the initial financing statement must satisfy Section 9-706(c).

4. Continuation. Subsection (d) refers to the two methods by which a secured party may continue the effectiveness of a pre-effective-date financing statement under this Part. The Comments to Section 9-705 and 9-706 explain these methods.

5. Termination. The effectiveness of a pre-effective-date financing statement may be terminated pursuant to subsection (c). This section also provides an alternative method for accomplishing this result: filing a termination statement in the office in which the financing statement is filed. The alternative method becomes unavailable once an initial financing statement that relates to the pre-effective-date financing statement and satisfies Section 9-706(c) is filed in the jurisdiction and office determined by this Article.

Example 4: The facts are as in Example 1, except that SP wishes to terminate a financing statement filed in State X. As explained in Example 1, the financing statement may be amended in accordance with the law of the jurisdiction governing perfection under this Article, i.e., in accordance with the substantive law of State Y. As enacted in State Y, subsection (c)(1) is inapplicable because the financing statement was not filed in the State Y filing office specified in Section 9-501. Under subsection (c)(2), the financing statement may be amended by filing in the State Y filing office an initial financing statement followed by a termination statement. The filing of an initial financing statement together with a termination statement also would be legally sufficient under subsection (c)(2), but Section 9-512(a)(1) may render this method impractical. The financing statement also may be amended under subsection (c)(3), but the resulting initial financing statement is likely to be very confusing. In each instance, the initial financing statement must satisfy Section 9-706(c). Applying the law of State Y, subsection (e) is inapplicable, because the financing statement was not filed in "this State, " i.e., State Y.

This section affords another option to SP. Subsection (b) provides that the effectiveness of a financing statement may be terminated either in accordance with the law of the jurisdiction governing perfection (here, State Y) or in accordance with the substantive law of the jurisdiction in which the financing statement if filed (here, State X). Applying the law of State X, the financing statement is filed in "this State," i.e. State X, and subsection (e) applies. Accordingly, the effectiveness of the financing statement can be terminated by filing a termination statement in the State X office in which the financing statement is filed, unless an initial financing statement that relates to the financing statement and satisfies Section 9-706(c) as enacted in State X has been filed in the jurisdiction and office determined by this Article (here, the State Y filing office).

OFFICIAL COMMENT

Comment. - This section permits a secured party to file an initial financing statement or continuation statement necessary under this part to continue the effectiveness of a financing statement filed before this Article takes effect or to perfect or otherwise continue the perfection of a security interest. Because a filing described in this section typically operates to continue the effectiveness of a financing statement whose filing the debtor already has authorized, this section does not require authorization from the debtor.

OFFICIAL COMMENT

Comment. - 1. Law Governing Priority. Ordinarily, this article determines the priority of conflicting claims to collateral. However, when the relative priorities of the claims were established before July 1, 2001, former article 9 governs.

Example 1: In 1999, SP-1 obtains a security interest in a right to payment for goods sold ("account"). SP-1 fails to file a financing statement. This Article takes effect on July 1, 2001. Thereafter, on August 1, 2001, D creates a security interest in the same account in favor of SP-2, who files a financing statement. This Article determines the relative priorities of the claims. SP-2's security interest has priority under section 9-322(a)(1).

Example 2: In 1999, SP-1 obtains a security interest in a right to payment for goods sold ("account"). SP-1 fails to file a financing statement. In 2000, D creates a security interest in the same account in favor of SP-2, who likewise fails to file a financing statement. This Article takes effect on July 1, 2001. Because the relative priorities of the security interests were established before the effective date of this Article, former Article 9 governs priority, and SP-1's security interest has priority under former section 9-312(5)(b).

Example 3: The facts are as in Example 2, except that, on August 1, 2001, SP-2 files a proper financing statement under this article. Until August 1, 2001, the relative priorities of the security interests were established before the effective date of this Article, as in Example 2. However, by taking the affirmative step of filing a financing statement, SP-2 established anew the relative priority of the conflicting claims after the effective date. Thus, this article determines priority. SP-2's security interest has priority under section 9-322(a)(1).

As Example 3 illustrates, relative priorities that are "established" before the effective date do not necessarily remain unchanged following the effective date. Of course, unlike priority contests among unperfected security interests, some priorities are established permanently, e.g., the rights of a buyer of property who took free of a security interest under former article 9.

One consequence of the rule in subsection (a) is that the mere taking effect of this article does not of itself adversely affect the priority of conflicting claims to collateral.

Example 4: In 1999, SP-1 obtains a security interest in a right to payment for lottery winnings (a "general intangible" as defined in former Article 9 but an "account" as defined in this Article). SP-1's security interest is unperfected because its filed financing statement covers only "accounts." In 2000, D creates a security interest in the same right to payment in favor of SP-2, who files a financing statement covering "accounts and general intangibles." Before this Article takes effect on July 1, 2001, SP-2's perfected security interest has priority over SP-1's unperfected security interest under former section 9-312(5). Because the relative priorities of the security interests were established before the effective date of this Article, former Article 9 continues to govern priority after this Article takes effect. Thus, SP-2's priority is not adversely affected by this Article's having taken effect.

Note that were this article to govern priority, SP-2 would become subordinated to SP-1 under section 9-322(a)(1), even though nothing changes other than this article's having taken effect. Under section 9-704, SP-1's security interest would become perfected; the financing statement covering "accounts" adequately covers the lottery winnings and complies with the other perfection requirements of this article, e.g., it is filed in the proper office.

Example 5: In 1999, SP-1 obtains a security interest in a right to payment for lottery winnings - a "general intangible" (as defined under former article 9). SP-1's security interest is unperfected because its filed financing statement covers only "accounts." In 2000, D creates a security interest in the same right to payment in favor of SP-2, who makes the same mistake and also files a financing statement covering only "accounts." Before this article takes effect on July 1, 2001, SP-1's unperfected security interest has priority over SP-2's unperfected security interest, because SP-1's security interest was the first to attach. See former section 9-312(5)(b). Because the relative priorities of the security interests were established before the effective date of this Article, former Article 9 continues to govern priority after this Article takes effect. Although section 9-704 makes both security interests perfected for purposes of this article, both are unperfected under former article 9, which determines their relative priorities.

2. Financing Statements Ineffective Under Former Article 9 but Effective Under This Article. If this article determines priority, subsection (b) may apply. It deals with the case in which a filing that occurs before the effective date of this Article would be ineffective to perfect a security interest under former article 9 but effective under this article. For purposes of section 9-322(a), the priority of a security interest that attaches on or after July 1, 2001, and is perfected in this manner dates from the time this Article takes effect.

Example 6: In 1999, SP-1 obtains a security interest in D's existing and after-acquired instruments and files a financing statement covering "instruments." In 2000, D grants a security interest in its existing and after-acquired accounts in favor of SP-2, who files a financing statement covering "accounts." After this Article takes effect on July 1, 2001, one of D's account debtors gives D a negotiable note to evidence its obligation to pay an overdue account. Under the first-to-file-or-perfect rule in section 9-322(a), SP-1 would have priority in the instrument, which constitutes SP-2's proceeds. SP-1's filing in 1999 was earlier than SP-2's in 2000. However, subsection (b) provides that, for purposes of section 9-322(a), SP-1's priority dates from the time this article takes effect (July 1, 2001). Under section 9-322(b), SP-2's priority with respect to the proceeds (instrument) dates from its filing as to the original collateral (accounts). Accordingly, SP-2's security interest would be senior.

Subsection (b) does not apply to conflicting security interests each of which is perfected by a pre-effective-date filing that was not effective under former article 9 but is effective under this article.

Example 7: In 1999, SP-1 obtains a security interest in D's existing and after-acquired instruments and files a financing statement covering "instruments." In 2000, D grants a security interest in its existing and after-acquired instruments in favor of SP-2, who files a financing statement covering "instruments." After this article takes effect on July 1, 2001, one of D's account debtors gives D a negotiable note to evidence its obligation to pay an overdue account. Under the first-to-file-or-perfect rule in section 9-322(a), SP-1 would have priority in the instrument. Both filings are effective under this article, see section 9-705(b), and SP-1's filing in 1999 was earlier than SP-2's in 2000. Subsection (b) does not change this result.

OFFICIAL COMMENT

Comment. - These transition provisions largely track the provisions of Part 7, which govern the transition to the 1998 revision of this Article. The Comments to the sections of Part 7 generally are relevant to the corresponding sections of Part 8. The 2010 amendments are less far-reaching than the 1998 revision. Although Part 8 does not carry forward those Part 7 provisions that clearly would have no application to the transition to the amendments, as a matter of prudence Part 8 does carry forward all Part 7 provisions that are even arguably relevant to the transition.

The most significant transition problem raised by the 2010 amendments arises from changes to Section 9-503(a), concerning the name of the debtor that must be provided for a financing statement to be sufficient. Sections 9-805 and 9-806 address this problem.

Example: On November 8, 2012, Debtor, an individual whose "individual name" is "Lon Debtor" and whose principal residence is located in State A, creates a security interest in certain manufacturing equipment. On November 15, 2012, SP perfects a security interest in the equipment under Article 9 (as in effect prior to the 2010 amendments) by filing a financing statement against "Lon Debtor" in the State A filing office. On July 1, 2013, the 2010 amendments, including Alternative A to Section 9-503(a), take effect in State A. Debtor's unexpired State A driver's indicates that Debtor's name is "Polonius Debtor." Assuming that a search under "Polonius Debtor" using the filing office's standard search logic would not disclose the filed financing statement, the financing statement would be insufficient under amended Section 9-503(a)(4) (Alt. A). However, Section 9-805(b) provides that the 2010 amendments do not render the financing statement ineffective. Rather, the financing statement remains effective - even if it has become seriously misleading - until it would have ceased to be effective had the amendments not taken effect.

The most significant transition problem addressed by the 1998 revision arose from the change in the choice-of-law rules governing where to file a financing statement. The 2010 amendments do not change the choice-of-law rules. Even so, the amendments will change the place to file in a few cases, because certain entities that were not previously classified as "registered organizations" would fall within that category under the amendments.