Question/Answer for Assignment 23 (Maintaining Perfection through Changes of Name, Identity, and Use) and Assignment 24 (Maintaining Perfection through Relocation of the Debtor or the Collateral)

1. I have a question about § 9-315(d) and proceeds. Let's say that Bank took a security interest in Debtor's tractor, and Bank filed a financing statement that covered "all of the debtor's personal property." But, let's also say that the Debtor didn't sign anything authorizing the Bank to file that financing statement; the Bank just did it. Then, say that the Debtor (without the Bank's permission) sells the tractor for cash and uses the cash to buy a forklift. Then the debtor later files for bankruptcy, and the trustee is trying to take possession of the forklift and sell it and is trying to avoid the Bank's security interest. The question is whether Bank would have a perfected security interest in the forklift, but I'm not sure how to analyze this.

Could the trustee say that the Bank NEVER had a perfected security interest in the forklift because it never had a perfected security interest in the original tractor, given that Bank's financing statement was not authorized (since the collateral description was overbroad) and was thus not effective? If that works, then if the SI in the tractor was never perfected, and if that's the case, then it seems like Bank's SI in the forklift (as proceeds) would not be even temporarily perfected under § 9-315(c).

Good thinking, although the trustee's argument will probably fail. The argument does have a decent textual basis: if you look at § 9-510(a), it says "A filed record is effective only to the extent that it was filed by a person that may file it under Section 9-509." And § 9-509(a) says that "A person may file an initial financing statement ... only if (1) the debtor authorizes the filing in an authenticated record or pursuant to subsection (b) or (c) ...." Putting those together, the trustee could argue: (1) Debtor did not authorize the filing in an authenticated record, and the filing (with the overbroad description) was not authorized by § 9-509(b) because the security agreement only covered the tractor, not "all of the debtor's personal property." (2) Therefore, the "only if" condition that would have permitted Bank to file the UCC-1 was not satisfied, meaning that Bank "may not" file the UCC-1. (3) Therefore, because it was filed by someone that "may" file it, it wasn't effective under § 9-510(a). (4) Therefore, since the filing wasn't effective, it didn't perfect Bank's security interest. That's not a bad textual argument.

But it probably won't work, because § 9-510(a) says that "A filed record is effective only to the extent that ...." (emphasis added). This "to the extent that" language implies that a filed record may be effective in part and ineffective in part. Because the security agreement covered the tractor, the debtor had authorized the filing of a UCC-1 covering the tractor under § 9-509(b). Thus, a court could say that the overbroad financing statement is effective to the extent that it covers the tractor, but is not effective with respect to any other assets of the debtor (because the overbreadth was not authorized by the debtor). If the court takes that interpretation of § 9-510(a) — and that's what courts have done — then Bank's security interest in the tractor was perfected, and thus Bank's security interest in the forklift would be temporarily perfected under § 9-315(c).

Why am I confident about that interpretation? Because it is clear from the comments that's what the drafters intended. If you look at § 9-509, comment 4, Example 1, you can see this:

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.

Keep in mind that there would still be a potential consequence for the Bank's having filed the overbroad financing statement — Bank will be liable under § 9-625(e)(3) for the $500 statutory penalty for filing a UCC-1 that it was "not entitled to file under Section 9-509(a)."

OK, so if the court rejects the trustee's argument, then how does § 9-315(d) apply in this situation? My first thought was that Bank could not claim continuous perfection by means of the initial UCC-1, because it wasn't authorized as to anything except the tractor, and so it wouldn't have been authorized (and thus couldn't be effective) to perfect a security interest in the forklift. Under that logic, Bank would have to file a brand new UCC-1 that properly covers the forklift.

But then I looked at § 9-509(b), and it says that by entering into the security agreement covering the tractor, the debtor authorized the filing of a UCC-1 covering the tractor and any "property that becomes collateral under Section 9-315(a)(2)" as identifiable proceeds. If I understand that, that means Debtor authorized the filing of a UCC-1 as to any proceeds, and the forklift is proceeds, so Debtor authorized a UCC-1 covering the forklift, and the existing UCC-1 (even though overbroad) does cover the forklift. On that theory, Bank's security interest in the forklift is continuously perfected. Is that correct?

Yes, most likely. Again, as discussed above, there's a plausible textual argument for treating the entire filing as ineffective based on its overbreadth, but most courts have rejected that based on the "to the extent that" language. Making the Bank file a new UCC-1 covering the forklift is not going to provide third party searchers with any more information than they're already getting from the "overbroad" initial UCC-1. For that reason, I suspect that most courts would say that the initial UCC-1, though still overbroad, is effective to the extent that it covers the forklift, and thus the Bank's security interest in the forklift would be continuously perfected under § 9-315(d)(3). Again, going back to the comment Example noted above:

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.) [§ 9-509, comment 4, Example 1]

I understand that, but then it seems like there's no real disincentive to a lender not to file an overbroad financing statement, whether you get authority from the debtor or not. $500 is a slap on the wrist for a big bank. And no one who didn't suffer any actual harm from the overbroad filing is going to sue just to collect $500. What's the point, then? Why not put teeth in the rule, either by saying the overbroad statement is completely ineffective, or by increasing the penalty to something meaningful?

I don't disagree with your critique. Still, I would not expect the drafters to put teeth in the rule by saying that an overbroad statement is entirely ineffective (and if courts routinely began holding them entirely ineffective, I expect that the Permanent Editorial Board for the UCC would issue new comments expressing their disagreement, and perhaps propose a statutory amendment to overrule those cases). I do agree that the $500 statutory penalty — which had some teeth (if only baby teeth) in 1962 when the UCC became effective — is entirely inadequate today, and it would make sense to consider raising that penalty to a level that would discourage the sort of calculated overreaching implied by your question. I don't think the drafters are likely to propose changes at this point, however. They are very (understandably) sensitive to maximizing the uniformity of Article 9 from state to state. And the state bankers' associations would undoubtedly have the pull in many states to block bills that would increase the statutory penalty.

2. I have a question about the "name change" rule in § 9-507(c) and the "new debtor" rule in § 9-508(b). If the debtor changes its name, and the name change is seriously misleading, § 9-507(c) says that the secured party has to amend its existing financing statement to reflect the new name within 4 months in order to remain perfected as to collateral acquired by the debtor more than four months after the name change. By contrast, if the collateral is transferred to a "new debtor," and the new debtor's name is seriously misleading as compared to the original debtor, then § 9-508(b) says that the secured party has to file a new initial financing statement in the name of the "new debtor" within four months after the new debtor becomes bound under the original security agreement in order to maintain perfection as against collateral acquired by the new debtor after that 4 month period.

Why does § 9-507(c) say the secured party has to file an amendment to the initial UCC-1, but § 9-508(b) requires the filing of a whole new UCC-1 (rather than the amendment of the existing one)? The situations seem analogous, so I don't understand why an amendment is required for one and a new filing for the other.

Another good question! The explanation is that in the name change scenario, the debtor is not actually changing. There's been no transfer of the collateral. The same debtor owned the collateral before as still owns it (albeit now operating under a different name). In that situation, the secured party doesn't want to file a brand-new UCC-1. If it files a brand new UCC-1 rather than amending the old one, then when the old one lapses, the secured party will still be perfected, but now its potential priority vs. third parties would be determined from the date of the new UCC-1 filing (rather than from the date of the now-lapsed UCC-1). By filing an amendment, the secured party's priority will (as long as the secured party remains perfected) date back to the date the initial UCC-1 was filed.

But in the "new debtor" scenario, the new debtor is an entirely different legal entity from the original debtor. There's been a transfer of the collateral from the original debtor to the "new debtor." Merely amending the existing financing statement to change the name of the debtor would imply that it is the same debtor. But it isn't. Thus, an entire new UCC-1 filing is warranted.

3. I have a question about how the four-month rule would work with respect to automatic perfection of a PMSI with respect to consumer goods. The Understanding book mentioned that Maine has a rule that require filing to perfect a PMSI in consumer goods worth over $10,000. So suppose Debtor (located in Maine) buys a $20,000 boat for personal use, grants Seller a security interest, Seller does not file, and then Debtor moves to New Hampshire (which has automatic perfection for PMSIs in consumer goods without regard to value). Seller wasn't perfected while Debtor lived in Maine and Maine law controlled. Does Seller become perfected as soon as Debtor moves to New Hampshire and New Hampshire law then begins to govern perfection? That seems like a weird outcome.

It may seem weird, but that's the correct result. New Hampshire law begins to govern perfection the moment the Debtor relocates to New Hampshire. At that moment, the applicable law (New Hampshire's version of § 9-309(1)) says that Seller's purchase money security interest in consumer goods is automatically perfected — even though it had been unperfected while Maine law governed (before Debtor's relocation). This may seem strange, but it really isn't. Third parties in New Hampshire are presumed to know New Hampshire's perfection rules — and in New Hampshire, someone thinking about taking a security interest in the Debtor's existing consumer goods are presumed to appreciate the risk that the debtor may have acquired the goods using purchase money credit that has not been paid off.

What about the reverse? What if Debtor lived in New Hampshire, where auto perfection applied, bought the boat in New Hampshire, granted a PMSI in it, Seller didn't file, and then Debtor moved to Maine (where auto perfection would not apply under Maine's version of § 9-309(1))?

In that situation, Seller would've been perfected under New Hampshire law at the time of Debtor's relocation (by virtue of automatic perfection). Thus, while Maine law begins to govern immediately, under Maine's version of § 9-316(a)(2), Seller is temporarily perfected in Maine for four months. To remain continuously perfected after that four months is up, Seller will have to file a UCC-1 in Maine during that four month period, or its perfected status will lapse (and it will be deemed never to have been perfected as against a third party who purchased an interest in the boat prior to the lapse of Seller's perfection). § 9-316(b).