Seek But You May Not Find PDF
Seek But You May Not Find PDF
Seek But You May Not Find PDF
1985
Recommended Citation
Gerald T. McLaughlin, "Seek But You May Not Find": Non-UCC Recorded, Unrecorded and Hidden Security Interests Under Article 9 of the
Uniform Commercial Code, 53 Fordham L. Rev. 953 (1985).
Available at: http://ir.lawnet.fordham.edu/flr/vol53/iss5/1
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ARTICLE
INTRODUCTION
S EEK and you shall find:' That is the message of the Scriptures. Un-
fortunately, the message of Article 9 of the Uniform Commercial
Code (UCC or Code) is less comforting. The message of Article 9 might
be more aptly phrased: Seek but you may not find.
Article 9 provides "a comprehensive scheme for the regulation of [con-
sensual] security interests in personal property and fixtures." 2 In order to
notify a subsequent creditor of his security interest in collateral, Article 9
normally requires a secured party to file a financing statement. 3 Thus, a
later creditor can discover a record of a prior creditor's security interest
and will be able to act accordingly.4
What every creditor should realize, however, is that Article 9 tolerates
"non-UCC recorded," "unrecorded" and "hidden" security interests.'
As defined in this Article, a "non-UCC recorded" security interest is an
attached security interest6 that is recorded somewhere other than in the
Article 9 filing system.7 An "unrecorded" security interest, on the other
hand, is an attached security interest that is not recorded in any filing
* Professor of Law, Fordham University School of Law; Visiting Professor of Law,
Brooklyn Law School; LL.B., 1966, New York University.
1. Luke 11:9 (New Am. Standard Version) ("[S]eek and you shall find .....
2. U.C.C. 9-101 official comment (1977); see id. 9-102(1)(a), (2). Unless other-
wise noted, all citations are to the 1977 Official Text of the Uniform Commercial Code
(U.C.C. or Code).
3. See id. 9-302(l), 9-303.
4. In the normal case, the Code gives priority to the creditor who first files a financ-
ing statement. See id. 9-312(5)(a). Thus, when a subsequent creditor discovers a prior
security interest he will either refuse to make the loan or will make the loan with knowl-
edge of his junior interest in the collateral.
5. See generally Baird & Jackson, Possession and Ownership: An Examination of the
Scope of Article 9, 35 Stan. L. Rev. 175, 176-77 (1983) (discussing Article 9's "internal
risks"); Ryan, Legal Opinions to Third Parties; Representation.%and WarrantiesCovering
Security Interests in PersonalProperty,in II ALI-ABA Resource Materials, Banking and
Commercial Lending Law 121, 135-47 (1980) (discussing several examples of U.C.C.
search problems).
6. See U.C.C. 9-203 (1977) (discussing when a security interest attaches).
7. See infra Pt. I.
FORDHAM LAW REVIEW [Vol. 53
17. See Baird & Jackson, supra note 5, at 177. Although a consignor does not file a
financing statement, he may still be able to take priority over a subsequent secured party.
See U.C.C. 2-326(3)(a), (b) (1977).
18. A good treatment of the relationship between fixtures and Article 9 is found in J.
White & R. Summers, Handbook of the Law Under the Uniform Commercial Code
25-7 to -11, at 1053-64 (2d ed. 1980).
19. U.C.C. 9-302(3)(a) (1977). In addition to security interests in aircraft and copy-
rights, which are discussed in this Article, security interests in other types of property are
subject to federal filing requirements. See e.g., 35 U.S.C. 261 (1982) (patents); 46
U.S.C. 921(a) (1982) (vessels of the United States); 49 U.S.C. 11303(a) (1982) (rail-
road rolling stock).
20. U.C.C. 9-302(4) (1977); see ad 9-104(a).
21. 49 U.S.C. app. 1403(a) (1982).
FORDHAM LAW REVIEW [Vol. 53
The Code also provides that an Article 9 filing is not required to per-
fect a security interest in property subject to state certificate of title stat-
utes or state central filing statutes other than Article 9.29 State certificate
of title statutes have been enacted to cover automobiles and other types
of mobile goods.3 0 Where these statutes control, security interests are to
be recorded on the certificate of title of the respective car or boat, 3I not in
the Article 9 filing system.
EXAMPLE III: On June 1, A lends B $3,000 secured by an interest in
B's automobile. The applicable law of the state requires that any security
interest in the car be recorded on the car's certificate of title. On June 5,
A has his security interest recorded on the certificate of title and takes
possession of that certificate of title. If on June 10, C, a subsequent credi-
tor of B, searches the Article 9 filings, he will find no record of A's prior
security interest in the car. Nonetheless A's security interest in the car
properly recorded on the certificate of title will take priority over C's
security interest.3 2
Generally speaking, the presence of non-UCC recorded security inter-
ests should not pose serious difficulties for a sophisticated lender. First of
all, with respect to certain types of collateral, even when Article 9 re-
quires a federal filing, a secured creditor may still make an additional
filing in the Article 9 system.33 Thus, a second creditor may occasionally
discover the existence of a federally filed security interest through a
search of the Article 9 filing system. Second, even when this does not
happen, a lender should quickly discover any applicable non-Article 9
recording system by analyzing the type of collateral involved in the trans-
action and the ramifications of section 9-302(3). 3" Once he realizes that
federal law requires a national filing (Examples I and II), the lender will
be able to search in the correct filing system and discover any prior secur-
ity interest. Similarly, once the lender is aware that a state certificate of
title statute requires that security interests be recorded on the certificate
of title of the car or boat (Example III), then the lack of an Article 9
filing will not mislead him.
the Article 9 filings will obviously not uncover any record of a possessory
security interest in a life insurance policy. Nonetheless such a security
interest is valid under state law and will take priority over subsequent
lenders.
Possessory security interests that arise under Article 9 (Example IV),
Article 8 (Example V), or state common or statutory law should not
present serious problems for the commercial lender. Possession by a
third party has traditionally constituted a form of notice in lieu of fil-
ing;4 7 possession of collateral by someone other than the debtor should
alert a lender to the possibility that the party in possession may claim an
interest in the collateral. Indeed, the pledge is the oldest form of enforce-
able security interest in personal property. 4 Thus, a potential creditor
should always inquire why collateral is in the possession of a third party
and should ask for representations from the debtor and the third party
that the third party has no claim to or security interest in that collateral.
2. Automatically Perfected Security Interests
Automatically perfected security interests are security interests that
are perfected from the time of attachment without either filing or posses-
sion. Two 4of
9
these automatically perfected security interests will be ana-
lyzed here.
a. Section 9-302(1)(d)
Section 9-302(l)(d) of the Code permits automatic perfection of
purchase money security interests 50 in most types of consumer goods. 5'
EXAMPLE VI: On June 1, A sells B a jade necklace for B's personal
unearned premiums, a general intangible. The perfection of a pledge of in-
tangibles under the common law required possession by the pledgee of the evi-
dence of the pledge itself. Since [the pledgee] retained possession of the
premium finance agreement under which the security interest in unearned pre-
miums was created, it would appear that sufficient compliance was had with the
pledge perfection requirements of Maine common law.
28 U.C.C. Rep. Serv. (Callaghan) 186, 189 & n.5 (Bankr. D. Me. 1980); see Annot. 53
A.L.R. 2d 1396, 1404-06 (1957) (cases holding that a pledge of an interest in a life insur-
ance policy can be created by manual delivery of the policy); see also 30 N.Y. Jur. 889,
at 146 (1963) ("The assignment by the insured of a life insurance policy upon his life as
collateral security does not divest the insured of his general property in the policy but
merely creates a lien in favor of the assignee to the extent of the debt owed.").
47. Article 9 recognizes "suitable alternative systems for giving public notice."
U.C.C. 9-302 official comment 1 (1977). "As at common law, there is no requirement of
filing when the secured party has possession of the collateral ... " Id. official comment
2.
48. I G. Gilmore, Security Interests in Personal Property 14.1 (1965).
49. On automatically perfected security interests, see B. Clark, The Law of Secured
Transactions Under the Uniform Commercial Code (1980) 1 12.2; J. White & R. Sum-
mers, supra note 18, 23-7 to -9, at 920-33.
50. See U.C.C. 9-302(1)(d) (1977). "Purchase money security interests" are defined
in id. 9-107.
51. See id. 9-302(1)(d). "Consumer goods" are defined in id. 9-109(1). "Goods"
are defined in id. 9-105(I)(h). The UCC does not, however, permit automatic perfection
1985] HARD-TO-FIND SECURITY INTERESTS
use and A retains a security interest in the necklace to secure the unpaid
portion of the purchase price. In most states A's purchase money secur-
ity interest would be perfected without filing or possession.5" If on June
5, subsequent secured lender C searches the Article 9 filings, he would
discover no record of A's prior security interest. Despite the unrecorded
nature of A's security interest, C takes subject to A's automatically
53
per-
fected purchase money security interest in the jade necklace.
The drafters of Article 9 believed that the pre-Code exemption of con-
sumer credit transactions from filing requirements should be continued.'
As Professors White and Summers put it, without the consumer
purchase money exemption, "courthouses throughout the country would
be bulging at the seams.""
The drafters' decision to permit the automatic perfection of purchase
money security interests in most types of consumer goods will not cause
problems for all lenders. Several states either have not adopted 6 or have
limited5 7the section 9-302(l)(d) consumer goods automatic perfection
rule. But where the automatic perfection rule does apply, it can cause
serious problems for subsequent lenders.5 "
It is important to remember that the Code defines "consumer goods"
in relation to how those goods are used by the debtor, not in relation to
their intrinsic value.59 Depending on how the debtor uses it, a Renoir
painting or a jade necklace 'could constitute either "consumer goods,"
"equipment" or "inventory." Thus, if a commercial lender collateral-
of purchase money security interests in motor vehicles required to be registered. See id.
9-302(1)(d).
52. Most states have adopted 9-302(l)(d). Only Kansas, see Kan. Stat. Ann. tit. 84
9-302(1) comment 1983 subsection (1) (1983), and Oklahoma, see Okla. Stat. Ann. tit.
12A, 9-302(1) comment l(c)(d) (West 1985), have omitted subsection (l)(d). Louisi-
ana, of course, has not adopted the UCC as such, and only articles 1, 3, 4, 5, 7 and 8 have
been adopted in substance. See U.C.C. Rep. Serv., State Correlation Tables 191 (Calla-
ghan 1979). Some states, however, have adopted 9-302(1)(d) in modified form. See
infra note 57.
53. Under a recently enacted FTC regulation involving consumer credit transactions,
taking a nonpossessory, nonpurchase money security interest in the jade necklace would
not be an unfair credit practice by a lender. See infra notes 62-63 and accompanying text.
54. See U.C.C. 9-302 official comment 4 (1977).
55. J. White & R. Summers, supra note 18, 23-7 at 920.
56. See supra note 52.
57. The Maine version of 9-302(l) reads: "A financing statement must be filed to
perfect all security interests except the following:. . . (d) A purchase money security
interest in consumer goods where the amount financed. . . is less than S1,000.. .. "
Me. Rev. Stat. Ann. tit. 11, 9-302(I)(d) (Supp. 1984-1985); see Colo. Rev. Stat. 4-9-
302(1)(d) (Supp. 1984) (no filing required for goods with a purchase price of S250 or less);
Md. Com. Law Code Ann. 9-302(1)(d) (1975) (no filing required for goods with a
purchase price of S500 or less); Wis. Stat. Ann. 409.302(l)(d) (West Supp. 1984-1985)
(same).
58. See J. White & R. Summers, supra note 18, at 924.
59. See U.C.C. 9-109(1) (1977); B. Clark, supra note 49, at 9.1[1] ("The function
of the collateral in the hands of the debtor is the key.").
60. See U.C.C. 9-109 (1977). If the Renoir were hung in the debtor's living room, it
would constitute "consumer goods"; if it were hung in the debtor's business office, it
962 FORDHAM LAW REVIEW [Vol. 53
ized his loan with such valuable consumer goods, knowledge of prior
"unrecorded" purchase money security interests would be important.61
Although he may try to discover the existence of a prior purchase money
security interest, a commercial lender will be hard pressed to devise a
foolproof method of discovery. For example, a lender may demand that
the debtor produce a bill of sale showing where the debtor purchased the
collateral. If the debtor acts honestly and produces a real bill of sale, the
lender will then be able to ask the named seller whether he has retained
any security interest in the collateral. But what if the debtor produces a
forged bill of sale listing a confederate as the seller? The confederate will
simply lie and say that he retained no security interest in the collateral.
But a real seller may exist who has retained a purchase money security
interest in the collateral. This undiscovered security interest will, of
course, take priority over the security interest of the subsequent creditor.
The Federal Trade Commission recently made it an unfair credit prac-
tice for a lender "in connection with the extension of credit to consum-
ers," to take a nonpossessory, nonpurchase money security interest in
"household goods." 62 The definition of "household goods," however, ex-
cludes such items as antiques, jewelry and works of art.6 3 Thus, in Exam-
ple VI, C's nonpossessory, nonpurchase money security interest in the
jade necklace would not constitute an unfair credit practice.
b. Section 9-302(1)(e)
Section 9-302(l)(e) contains yet another automatic perfection rule,
although one of less significance than the automatic perfection rule gov-
erning purchase money security interests in consumer goods. If there is
an assignment of an insignificant amount of an assignor's outstanding
accounts, 64 the assignee-secured party need not file a financing statement
to perfect his security interest in the assigned accounts. 65
EXAMPLE VII: On June 1, A lends B $10,000 secured by $10,000
worth of B's outstanding accounts receivable. Assuming that the
$10,000 worth of accounts constitutes an insignificant amount of B's out-
standing accounts, A need not file to perfect his security interest in the
accounts. If on June 5, subsequent secured creditor C searches the Arti-
cle 9 filings, again he would discover no record of A's prior security in-
terest. Nonetheless, A has first priority in these accounts.
would constitute "equipment"; and if it were hung in the debtor's gallery for sale, it
would constitute "inventory." See id.
61. On this question, see generally J. White & R. Summers, supra note 18, at 924-25.
62. See 16 C.F.R. 444.1(i), .2(a)(4) (1985). The new regulation took effect on March
1, 1985. See id. 444, at 284.
63. See id. 444.1(i), at 284-85.
64. The official comment states that "[t]he purpose of the subsection (1)(e) exemption
is to save from ex post facto invalidation casual or isolated assignments. . . ." U.C.C.
9-302 official comment 5 (1977). Are casual or isolated assignments to be considered
assignments of an insignificant amount of accounts?
65. See id. 9-302(1)(e).
1985] HARD-TO-FIND SECURITY INTERESTS
Like the automatic perfection rule for purchase money security inter-
ests in consumer goods discussed above, this automatic perfection rule
for accounts will affect few commercial lenders.66 The reason is simple.
Section 9-302(1)(e) dispenses with filing only when there has been a
transfer of an insignificant part of a debtor's outstanding accounts. 67 As
the relevant case law shows, an "insignificant part of the [debtor's] out-
standing accounts" is a slippery concept and one too uncertain to be re-
lied on by prudent lenders. 68 Thus, prudent lenders against accounts will
routinely file a financing statement no matter how insignificant the value
of their accounts collateral. 69 Thus, the section 9-302(1)(e) automatic
perfection rule will be encountered rarely-presumably only in situations
in which a prior lender has failed to file and is trying to bootstrap himself
into perfection.70
when they do create concern, the Code provides a way to protect against
them. Article 9 permits a secured party to prefile a financing statement
before his security interest attaches.7 6 By prefiling and then waiting to
make the loan, any temporarily unrecorded security interest in proceeds
will either have to be recorded or the grace period will lapse. If no prior
security interest in proceeds is perfected within the ten-day period, the
creditor has not hurt himself by delaying the loan. Under the Code, pri-
ority dates from the time of prefiling, not from the time the loan is made
or the security interest attaches." If, however, a prior security interest in
proceeds is perfected within the ten-day period, the creditor will usually
be able to cancel the loan without incurring any liability towards the
borrower. Typically, the borrower will have made a previous representa-
tion that no prior security interest exists.7 8 If one does exist, the borrower
will have made a material misrepresentation, and principles of estoppel"
should preclude the borrower from objecting to the loan cancellationw
Another ten-day grace period provision, section 9-312(4), provides
that a "purchase money security interest in collateral other than inven-
tory has priority over a conflicting security interest in the same collateral
. . .if the purchase money security interest is perfected at the time the
debtor receives possession of the collateral or within ten days thereaf-
ter."81 Although it is typically treated as a rule that gives a "second in
time" purchase money creditor greater rights than a "first in time" non-
purchase money creditor,8" section 9-312(4) can also work to create a
temporarily unrecorded security interest between a "first in time"
purchase money creditor and a "second in time" nonpurchase money
creditor.
EXAMPLE X: On June 1, A finances the purchase of equipment by
B. B receives the equipment on June 2. On June 5, B borrows money
from C, giving C a nonpurchase money security interest in the equip-
ment. If on June 5, C searches the Article 9 filings, he will not discover
76. See U.C.C. 9-402(1) (1977) ("A financing statement may be filed before a secur-
ity agreement is made or a security interest otherwise attaches.").
77. See id 9-312(5)(a) ("Conflicting security interests rank according to priority in
time of filing or perfection."); id 9-312 official comment 4 ("rank will be based on the
first filing or perfection"). A good example of how this system works is given at id. 9-
312 official comment 5 ex. 1.
78. See Ryan, supra note 5, at 194, 196 (illustrative representations and warranties to
protect lender).
79. Section 1-103 states that principles of law and equity, including estoppel, can sup-
plement the provisions of the Code unless a particular provision of the Code has dis-
placed pre-Code legal or equitable rules. See U.C.C. 1-103 (1977).
80. While prefiling and delayed lending will protect against "temporarily unre-
corded" security interests, the length of time between prefiling and lending may have to
be adjusted to meet local filing conditions. For example, if a particular jurisdiction is
behind seven days in indexing filings, a lender should wait seventeen days between prefil-
ing and making the loan. This will ensure that a filing on the tenth day of the grace period
will be discovered prior to making the loan.
81. Id 9-312(4).
82. See id. 9-312(4). See infra Example XXIX.
FORDHAM LAW REVIEW [Vol. 53
any record of A's purchase money security interest in the equipment. A
files a financing statement on June 9. According to the language of sec-
tion 9-312(4), A would have priority over C with respect to the
equipment.
Like the unrecorded security interests discussed above in Examples
VIII and IX, this ten-day temporarily unrecorded purchase money secur-
ity interest will not pose a serious problem for the typical commercial
lender. For a lender to be prejudiced by section 9-312(4), a prior creditor
must first achieve purchase money status. This is sometimes easier said
than done.13 Even if the prior creditor does achieve purchase money sta-
tus, a subsequent lender can protect himself from harm by adopting the
same prefiling strategy outlined above.8 4 Thus, if a lender prefiles and
then delays making the loan for more than ten days, either the ten-day
grace period will lapse or the prior temporarily unrecorded security in-
terest will appear in the filing system. If a prior security interest does
appear, the loan can be safely cancelled, assuming of course that the
debtor has made a previous representation that no such prior security
interest existed.
Before concluding this discussion of section 9-312(4) purchase money
security interests, one further point should be emphasized. According to
the language of the section, the ten-day grace period begins to run at the
time the debtor receives possession of the collateral.85 According to some
cases, this language must be read literally: The ten-day period runs from
the time he takes possession of the collateral as debtor, not from the time
he takes possession of the collateral in some other capacity. 6 This read-
ing can create a particularly dangerous form of temporarily unrecorded
security interest.
EXAMPLE XI: On June 1, A (the seller) and B (the buyer) enter into
negotiations for the sale of certain equipment. On June 10, however,
before the parties conclude all of the terms of the sale, A permits B to
take possession of the equipment. On July 1, B approaches C and asks for
a loan, offering the equipment still owned by A as collateral. Because B
ostensibly owns the equipment, C agrees to the loan and searches the
Article 9 filings to discover any record of a prior security interest in the
equipment. Finding no record of A's interest, C lends B the money and
perfects his security interest on July 2. On August 30, A and B finally
conclude the terms of the credit sale and the purchase money security
83. For example, an "add on" clause may destroy purchase money status. See Mc-
Laughlin, "Add On" Clauses in Equipment Purchase Money Financing: Too Much of a
Good Thing, 49 Fordham L. Rev. 661, 682-83 (1981).
84. See supra text accompanying notes 76-77.
85. See U.C.C. 9-312(4) (1977). The Code defines the term "debtor" as "the person
who owes payment or other performance of the obligation secured." Id. 9-105(l)(d).
86. See In re Ultra Precision Indus., Inc., 503 F.2d 414, 417 (9th Cir. 1974); Brodie
Hotel Supply, Inc. v. United States, 431 F.2d 1316, 1319 (9th Cir. 1970). For a good
summary of differing views on this issue, see Bank One v. Farmers Prod. Credit, 39
U.C.C. Rep. Serv. (Callaghan) 1511, 44 Bankr. Rep. 716 (Bankr. N.D. Ohio 1984).
1985] HARD-TO-FIND SECURITY INTERESTS
92. See id. 9-304(6) (perfection after the 21-day period depends on compliance with
Article 9).
93. See id. 9-304(4).
94. Id.
95. In an application for a letter of credit, the buyer (customer), see id. 5-103(l)(g),
routinely gives the bank (issuer), see id. 5-103(l)(c), a security interest in the documents
involved in the transaction. See H. Harfield, Bank Credits and Acceptances 1 8, at 313
app. B (5th ed. 1974).
96. For a definition of "value," see U.C.C. 1-201(44) (1977). Subsection (a) states
that, inter alia, "a binding commitment to extend credit" constitutes "value." Id. 1-
201(44)(a).
97. See id. 9-304(4).
98. Professors White and Summers argue that 9-304(4) does not permit a secured
party's perfected security interest in a negotiable document to continue in the goods for
he rest of the 21-day period once the debtor trades in the negotiable document and takes
possession of the goods. See J. White & R. Summers, supra note 18, at 930-31. But in
Example XIJ! the negotiable document representing the goods is still outstanding when
1985] HARD-TO-FIND SECURITY INTERESTS
the subsequent creditor takes a security interest in the goods. According to Article 9,
when the goods are "in the possession of the issuer of a negotiable document therefor, a
security interest in the goods is perfected by perfecting a security interest in the docu-
ment, and any security interest in the goods otherwiseperfected during such period is sub-
ject thereto." U.C.C. 9-304(2) (1977) (emphasis added).
99. See U.C.C. 9-304(4) (1977) (grace period of 21 days).
100. See I G. Gilmore, supra note 48, at 449-50.
101. See supra notes 76-77.
102. "A security interest in. . . negotiable documents may be perfected by filing."
U.C.C. 9-304(1) (1977). A bill of lading is a "document" for the purposes of Article 9.
See id. 9-105(1)(f), 1-201(15).
103. See infra notes 106-11 and accompanying text.
104. Commercial letters of credit are commonly used to pay for goods shipped in inter-
national trade. See H. Harfield, supra note 95, at 38.
FORDHAM LAW REVIEW [Vol. 53
105. Third party possession of collateral may be a sign that there is an attached, see
U.C.C. 9-203(1) (1977), and perfected, see id. 9-302(l)(a), security interest in
collateral.
106. See id. 9-103(l)(d). A financing statement is effective for five years from the
date of filing. Id. 9-403(2).
107. The drafters did not want to burden the secured party with excessive monitoring
of the collateral and felt that
[t]he four-month period is long enough for a secured party to discover in most
cases that the collateral has been removed and refile in this state; thereafter, if
he has not done so, his interest, although originally perfected in the jurisdiction
from which the collateral was removed, is subject to defeat here by purchasers
of the collateral.
Id. 9-103 official comment 7.
108. If A did not file or take possession of the collateral before the end of the four-
month period, C would prevail over A. C, as a secured creditor, would be a "purchaser"
for the purposes of 9-103(l)(d). See id. 1-201(32), (33). Under 9-103(l)(d)(i), unless
A takes possession or files, his security interest "is thereafter deemed to have been un-
perfected as against a person who became a purchaser after removal." Thus C, a per-
fected secured party, would prevail over A, an unperfected secured party. See id. 9-
301(l)(a), 9-312(5)(a).
1985] HARD-TO-FIND SECURITY INTERESTS
4. Administrative Delays
A rather novel form of temporarily unrecorded security interest can
result from administrative delay in indexing a filing. According to sec-
tion 9-403(1) of the Code, filing is effective upon presentation to the filing
officer of an appropriate financing statement and the requisite filing
fee.1 12 The risk that the filing officer will delay indexing the filing is borne
1 13
by the subsequent creditor.
EXAMPLE XV: On June 1, A presents his financing statement and
filing fee to the filing officer. The filing officer does not index the filing
until June 6. If subsequent creditor C searches the filing index on June 5,
he would not discover any record of A's filing. Yet C would take subject
to A's security interest because the Code places the risk of administrative
delay and error on the second creditor.
Administrative delays in indexing are the inevitable by-product of any
filing system. Thus, temporarily unrecorded security interests caused by
indexing delays will never be fully eliminated. The only consolation is
that these administrative delays are usually short. Prefiling and loan
deferral, even for a few days, should protect against harm in the vast
majority of these cases. Occasionally, however, there is the exceptional
situation in which the delay is longer. For example, in 1983 "hundreds of
unfied and unprocessed documents" were discovered in a county clerk's
office in New York State. 14 While the documents apparently related to
real estate transactions," 5 the incident demonstrates that long indexing
delays can and do occur. It is difficult to devise a foolproof strategy to
protect against this problem. Perhaps the most that can be obtained is an
explicit and detailed representation in the security agreement that no
prior security interest exists.
112. The amount of the filing fee is left up to each state. U.C.C. 9-403(5) (1977).
113. See id. 9-407 official comment 1. Section 9-403(4) requires the filing officer to
index the filing under the name of the debtor.
114. N.Y. Times, Oct. 9, 1983, at 47, col. 1.
115. Id.
116. See supra text accompanying note 9.
1985] HARD-TO-FIND SECURITY INTERESTS
1. Name Change
Section 9-402(7) of the Code provides that when an organization or
individual changes its name so that a prior financing statement becomes
seriously misleading, the secured party need not refile under the new
name with respect to either collateral already owned by the debtor prior
to the name change or collateral acquired within four months of the
name change. 117 There must be a new filing, however, with respect118to
collateral acquired more than four months after such name change.
EXAMPLE XVI: On June 1, A files and perfects a security interest in
specified equipment of MPX Corporation. On June 5, MPX Corporation
changes its name to HIJ Corporation. If on June 10, subsequent secured
creditor C searches the Article 9 filings under the name of HIJ Corpora-
tion, he presumably will not discover A's prior filing under the name of
MPX corporation. Nonetheless, regardless of A's knowledge of the
name change, A's security interest in the specified equipment takes prior-
ity over C's subsequent security interest.1 1 9
A name change may frequently cause a different name hidden security
interest. At least in the case of a corporate name change, it should be
relatively easy to discover a prior security interest recorded under an ear-
lier corporate name. If the lender's attorney checks with the Secretary of
State's office, he can usually discover prior names of a corporation.1 20
Normally a corporation is obliged to amend its articles of incorporation
whenever it changes its name. 121 Once he obtains a prior corporate name,
117. See U.C.C. 9-402(7) & official comment 7 (1977). An "organization" as defined
in the Code includes, inter alia, a corporation, trust, estate or partnership. See i4L 1-
201(28).
118. Id. 9-402(7) & official comment 7. This new financing statement filed under the
debtor's new name may be signed by the secur~d party rather than by the debtor. Id 9-
402(2)(d).
119. See id. 9-402(7).
120. Corporate names are generally filed with the Secretary of State. See, e.g., Colo.
Rev. Stat. 7-71-101(2) (Supp. 1984) (efflective July 1, 1985); N.Y. Bus. Corp. Law
303(c) (McKinney Supp. 1984).
121. See, e.g., Cal. Bus. & Prof. Code 17,910 (West Supp. 1985); N.Y. Bus. Corp.
Law 801(b)(1) (McKinney 1978). A foreign corporation doing business in New York
may amend its application for authority to do business in the state so as to change its
corporate name "if such change has been effected under the laws of the jurisdiction of its
incorporation." Id 1308(a)(1).
FORDHAM LAW REVIEW [Vol. 53
the lender's attorney can run an Article 9 file search under this name and
discover whether any prior security interests exist.
Name changes by individuals, however, present more serious
problems. There does not seem to be any foolproof method of discover-
ing a prior name used by an individual. If this is true, why does the Code
opt to make the second creditor bear the risk of a prior hidden security
interest when there is little he can do to discover it? The simple answer
may also be the correct answer: The Code gives priority to the first cred-
itor because the first creditor is in no better position than the second
creditor to discover a name change. How can the first creditor assure
himself that his debtor is not using a different name to defraud some or
all of his subsequent creditors? When neither creditor can reasonably
discover the name change, it seems sensible at least to prefer the first
creditor over the second creditor.122 As a result, if a lender plans to lend
to an individual,' 23 he should at least keep this name change problem in
mind. Although there is no guarantee that it will uncover a prior iden-
tity, running a credit check is, of course, prudent. When there is real
concern, additional precautionary measures can be taken. Questioning
prior employers or credit references might be helpful in this regard.
2. Sale of the Collateral
Except in certain specified cases, "a security interest continues in col-
lateral notwithstanding sale. . . unless the disposition was authorized by
the secured party in the security agreement or otherwise .. ."124 If the
security interest in the original collateral was perfected by filing at the
time of the sale, the security interest should continue as a perfected se-
curity interest after the sale. 125 This can lead to a rather unusual form of
122. This is obvious from the generally accepted notion that first in time is first in
right. See U.C.C. 9-312(5) & official comments 4, 5 (1977).
123. A "purchase money" creditor who lends or extends credit to a debtor may not be
severely prejudiced by prior security interests filed under different names of the debtor. A
purchase money security interest in collateral normally means that the collateral has not
been in the possession of the debtor prior to the time of its purchase. See id. 9-107.
Thus, it is unlikely that anyone has previously filed with respect to this purchase money
collateral. Moreover, even if a prior creditor with an attached after-acquired property
interest has filed a financing statement under a previous name of the debtor, this may not
affect the priority of a subsequent purchase money creditor. Assuming the conditions of
9-312(4) (purchase money security interest in collateral other than inventory) are satis-
fied, a subsequent purchase money lender will take first priority over the after-acquired
property creditor. With respect to 9-312(3) (purchase money security interests in inven-
tory), however, the purchase money creditor's priority will depend on giving notice to the
after-acquired property creditor. See id. 9-312(3) & official comment 3. This will not
be feasible unless the purchase money creditor knows the name of the after-acquired
property creditor.
124. Id. 9-306(2).
125. If a security interest in original collateral continues notwithstanding its sale by the
debtor, then "[a] filed financing statement remains effective with respect to collateral
transferred by the debtor even though the secured party knows of or consents to the
transfer." Id. 9-402(7). There is, however, a problem in reconciling this language with
that of 9-306(2), which states that "a security interest continues. . . unless the disposi-
1985] HARD-TO-FIND SECURITY INTERESTS
tion was authorized by the secured party.. . ."Id. 9-306(2) (emphasis added). Could
a secured party's consent to the transfer of collateral by the debtor be construed as an
authorization to sell the collateral free of the secured party's security interest?
126. See id. 9-306(2).
127. Section 9-307(1) requires a "buyer in ordinary course of business" to qualify
under the definitional criteria of 1-201(9). See id 9-307(1). C would not qualify as a
buyer in ordinary course because B is not in the business of selling equipment.
128. See supra notes 124-25 and accompanying text.
129. See supra note 127.
130. See U.C.C. 1-201(9) (1977).
131. On this point see General Motors Acceptance Corp. v. Trovi~le, 6 U.C.C. Rep.
Serv. (Calaghan) 409 (Mass. App. 1969). For a discussion of whether a buyer who can-
not prevail under 9-307(1) can rely on 2-403 (good faith purchases), see J. White & R.
Summers, supra note 18, 25-15, at 1073-75.
FORDHAM LAW REVIEW[o [Vol. 53
collateral.' 32 One way to protect against harm from these security inter-
ests would be to trace the chain of title of the equipment. Once the names
of prior owners of the collateral are known, it would be easy to run file
searches under these names. Unfortunately, there is no easy way for a
subsequent lender to trace the chain of title to personal property and
uncover the names of prior owners. The law does not generally require
that personal property transfers-as opposed to real estate transfers-be
publicly recorded. 13 3 Thus, a lender can never be absolutely sure that he
has discovered the names of all prior owners.
As a practical matter, however, creditors of subsequent owners (such
as D in example XVII) will rarely be hurt by security interests created by
prior owners of equipment collateral. When there is an unauthorized
sale, the creditor of the prior owner (A in example XVII) has a security
interest in both the original collateral and in the proceeds.134 Thus, A can
satisfy his security interest out of either the original or the proceeds col-
lateral. Since the proceeds are in the hands of his immediate debtor (B 1in35
Example XVII), A may prefer initially to foreclose on the proceeds,
perhaps leaving subsequent creditor D a clear field with respect to the
original collateral now in the hands of C.
that the filing is proper."' To guard against this outside possibility, the
second creditor should demand a representation by the debtor that the
debtor owns the collateral. This is, of course, common procedure in com-
mercial financing. 47 In addition, the secured creditor should demand
proof that the debtor owns the collateral. Absent fraud by the debtor,
the name of the true owner should become apparent. Once the facts are
clear, a search of the files under the true owner's name should uncover
the prior security interest.
152. Under the Code, the classilication of "goods" collateral depends on the debtor's
use of collateral. See supra notes 59-60.
153. See U.C.C. 9-109 (1977) for classifications of goods. Consumer goods are goods
"used or bought for use primarily for personal, family or household purposes." Id. Thus,
if there is any possibility that a piece of equipment or inventory was ever used in the
debtor's home, the creditor should check the place of filing required for consumer goods.
The same problem could arise with respect to a change in the use of agricultural equip-
ment, but this should be a remote possibility because agricultural equipment tends to be
specialized and cannot be easily adapted to nonagricultural uses.
154. If the consumer goods constituted "household goods," a nonpossessory, non-
purchase money security interest in these goods would constitute an unfair credit prac-
tice. See 16 C.F.R. 444.1(i), .2(a)(4) (1985). See supra notes 59-61 and accompanying
text.
155. See supra note 153.
156. U.C.C. 9-401(3) (1977).
1985] HARD-TO-FIND SECURITY INTERESTS
157. Two states that have adopted the alternative subsection are Texas and Wyoming.
See Tex. Bus. & Com. Code Ann. 9.401(c) (Vernon Supp. 1985); Wyo. Stat. Ann. 34-
21-950(c) (1984). The great majority of states adopting the U.C.C. have adopted the
original subsection 9-401(3). See S.C. Code Ann. 36-9-401 reporter's comments (Law.
Co-op. 1977) (24 out of 28 states).
158. See U.C.C. 9-401(3) (1977) (alternative section).
159. Id.
160. See supra notes 106-11 and accompanying text.
161. Because the Renoir is a work of art, it is not covered by the FTC rule making it an
unfair credit practice to take a nonpossessory, non-purchase money security interest in
household goods. See 16 C.F.R. 444.1(i), 2(a)(4) (1985).
162. U.C.C. 9-103(1)(c) (1977). The full text reads:
If the parties to a transaction creating a purchase money security interest in
goods in one jurisdiction understand at the time that the security interest at-
taches that the goods will be kept in another jurisdiction, then the law of the
other jurisdiction governs the perfection and the effect of perfection or non-
perfection of the security interest from the time it attaches until thirty days after
the debtor receives possession of the goods and thereafter if the goods are taken
to the other jurisdiction before the end of the thirty-day period.
FORDHAM LAW REVIEW [Vol. 53
purchase money security interest in the goods. At the time of the sale
both A and B know that the goods now present in State X will be taken
by B to State Z for use. On June 3, A files a financing statement in State
Z pursuant to the rule of section 9-103(l)(c). This filing gives A perfec-
tion for thirty days after the date B receives possession of the goods (June
1). B, however, keeps the goods in State X, and on June 10, C lends B
money secured by these goods. C searches the Article 9 filings in State X
but163discovers no record of A's security interest because A filed in State
Z. B then removes the goods to State Z on June 20. A's perfected
security interest filed in State Z takes priority over C's perfected interest
in the same collateral filed in State X.
A national filing system for all types of Article 9 collateral would be
the simplest way to solve both the county-to-county and state-to-state
change of place problems illustrated in Examples XXI and XXII. With
a national filing system, the filing location would164
remain the same no
matter where the debtor or the collateral goes.
In the absence of a national filing system, however, secured creditors
can still take precautionary measures to protect against "change of
place" security interests. Consider first the state-to-state problem in Ex-
ample XXII. Prefiling and loan deferral offer the best protection for a
secured creditor. If the creditor prefiles in State X and then waits thirty
days before making the loan, either the prior filing in State Z will have
lapsed by the end of the thirty-day period or the collateral will have been
removed to State Z. To protect himself in the latter case, the creditor
can condition the loan on nonremoval of the collateral from State X, and
can therefore cancel the loan if the collateral is removed.
Absent prefiling and loan deferral, the secured creditor could request
to see the bill of sale with respect to the collateral. Section 9-103(l)(c) is a
special rule for purchase money security interests.165 If the debtor is hon-
est and gives the creditor the true bill of sale, the creditor will then be
able to ascertain whether the seller of the collateral 1 66
has retained a
purchase money security interest in the collateral.
Finally, if it is a customary security agreement, the secured creditor
will receive the debtor's representation that the collateral is free of prior
163. But see official comment 3 to 9-103, which states that caution may dictate filing
in both states X and Z.
164. See supra note 110 for a discussion of a national filing system.
165. See U.C.C. 9-103(1)(c) & official comments 2-3 (1977).
166. In the typical case, the seller of the collateral will be the purchase money secured
creditor. See id. 9-107(a). If a third party financier is the purchase money secured
creditor, a subsequent creditor should be able to discover this third party financier's inter-
est by identifying the seller. To protect himself, the third party financier will probably
make out his check to the order of either the seller or the seller and the debtor. See J.
White & R. Summers, supra note 18, at 1045. This is necessary for a third party financier
to ensure that his loan was in fact used to buy the collateral and thus that he is in fact a
purchase money creditor. See U.C.C. 9-107(b) (1977). Thus the identity of the third
party financier will probably be known to the seller.
1985] HARD-TO-FIND SECURITY INTERESTS
security interests. 6 7 Although the debtor may falsely make the represen-
tation, the due diligence of debtor's counsel will afford the secured credi-
tor at least some measure of protection.
The county-to-county "change of place" problem illustrated in Exam-
ple XXI will not pose a serious threat for most commercial lenders for
two reasons. First, with respect to the most common forms of commer-
cial collateral, such as inventory, chattel paper and nonagricultural ac-
counts and equipment, there will be some statewide filing.' 6 8 Thus,
intrastate moves will not impair a creditor's ability to discover a prior
security interest. Second, even in cases in which only local filing is re-
quired, intrastate moves will not always cause problems. In the case of
minerals, growing timber or crops, for example, there must always be a
filing in the county where the land is located.' 69 Because these types of
collateral are intimately connected with land, a creditor will presumably
check the filings in the county in which the land is located. When the
collateral is consumer goods or certain agricultural collateral, however,
intrastate moves by the debtor may cause serious "change of place" se-
curity interest problems. In these cases, filing may be required only in
the county of the debtor's residence. 7 This problem is more theoretical
than real, however, because commercial lenders usually do not rely on
these types of collateral as security for their loans.
174. Pre-Code law in Pennsylvania, for example, required that the persons offering an
instrument for recordation had the duty to see to it that it was properly recorded. See In
re Royal Electrotype Corp., 485 F.2d 394, 395 (3d Cir. 1973).
175. See Op. Att'y Gen. N.M. No. 62-1, 1 U.C.C. Rep. Serv. (Callaghan) 718, 727-28
(1963).
176. See, e.g., Hudleasco, Inc. v. State, 90 Misc. 2d 1057, 1062, 396 N.Y.S.2d 1002,
1006, (Ct. Cl. 1977), affid mem., 63 A.D.2d 1042, 405 N.Y.S.2d 784 (1978); Scot Lad
Foods, Inc. v. Secretary of State, 66 Ohio St. 2d 1, 9, 418 N.E.2d 1368, 1373 (1981); Op.
Att'y Gen. Ohio No. 3288, 1 U.C.C. Rep. Serv. (Callaghan) 768, 769 (1962).
177. See U.C.C. 9-402(1), (3) (1977). Section 9-402(1) requires that UCC-1 contain
the name and the signature of the debtor. See id. 9-402(1). Because a signature includes
"any symbol executed or adopted by a party," id. 1-201(39), the debtor could sign a
UCC-1 by signing his name or some other symbol. Thus, the UCC-1 may not always
include the debtor's name in two places.
1985] HARD-TO-FIND SECURITY INTERESTS
debtor in the body of the UCC- 1 rather than at the debtor's signature." 8
A printed or typed name is usually easier to read than a handwritten
signature. But what if the filing officer uses the printed or typed name of
the debtor to index the filing and the name of the debtor is misspelled?
Of course, a court may find that the financing statement is defective-
that is, misleading-in such cases.179 But a court may find that the error
in the spelling of the debtor's name is minor and as such does not negate
the effectiveness of the filing. This could cause a "hidden" security
interest.180
Section 9-402(8) states that "a financing statement substantially com-
plying with the requirements of this section is effective even though it
contains minor errors which are not seriously misleading."',' The impli-
cation of the section seems clear: Some errors in a financing statement
may not be sufficiently misleading to negate the effectiveness of a filing.
What these "minor errors" are, however, is not spelled out. Consider
possible minor errors in the spelling of the debtor's name. If the name of
the debtor is spelled "Padams" on the UCC-1 when his name is really
"Adams," a subsequent creditor cannot be expected to discover any rec-
ord of the filing. In such a case, the error in the spelling of the name
should not be treated as minor; it is a seriously misleading error that
should destroy the effectiveness of the filing.' 8 2 But are there situations in
which the misspelling of the debtor's name should not be treated as seri-
ously misleading?
EXAMPLE XXIV: On June 1, A lends McLaughlin S10,000 secured
by designated collateral. On June 3, A files a financing statement on
which he has typed the debtor's name as "McLaughlyn." The financing
178. See In re Kulesza, 4 U.C.C. Rep. Serv. (Callaghan) 66 (W.D. Mich. 1967) (filing
officer recorded the filing under the typed name "Kelesza" instead of the signed
"Kulesza".
179. See In re Raymond F. Sargent, Inc., 8 U.C.C. Rep. Serv. (Callaghan) 583, 593
(Bankr. D. Me. 1970); Bank of N. America v. Bank of Nutley, 94 NJ. Super. 220, 227
A.2d 535 (1967). But see In re Vaughan, 4 U.C.C. Rep. Serv. (Callaghan) 61 (W.D.
Mich. 1967).
180. See U.C.C. 9-402(8) (1977). For examples of cases in which courts have found
that mistake of name in indexing was a minor error and did not invalidate a security
interest, see Sales Fin. Corp. v. McDermott Appliance Co., 340 Mass. 493, 494, 165
N.E.2d 119, 119-20 (1960); Pavlick v. Reginald Oliver Co., 106 N.J.L. 292, 295, 148 A.
624, 626 (1930); Beneficial Fin. Co. v. Kurland Cadillac-Oldsmobile, Inc., 57 Misc. 2d
806, 811, 293 N.Y.S.2d 647, 652 (Sup. Ct. 1968), rev'd on othergrounds, 32 A.D.2d 643,
300 N.Y.S.2d 884 (1969). But see John Deere Co. v. William C. Pahl Constr. Co., 34
A.D.2d 85, 89, 310 N.Y.S.2d 945, 949 (1970) (misspelling of debtor's name was mislead-
ing and amounted to no filing at all).
181. U.C.C. 9-402(8) (1977).
182. Compare John Deere Co. v. William C. Pahl Constr. Co., 59 Misc. 2d 872, 874-
75, 300 N.Y.S.2d 701, 704 (Sup. Ct. 1969) (misspelling of debtor's name misleading when
five other financing statements had correct name), affid, 34 A.D.2d 85, 310 N.Y.S.2d 945
(1970) with Beneficial Fin. Co. v. Kurland Cadillac-Oldsmobile, Inc., 57 Misc. 2d 806,
811, 293 N.Y.S.2d 641, 652 (Sup. Ct. 1968), rev'd on other grounds, 32 A.D.2d 643, 300
N.Y.S.2d 884 (1969) (misspelling of debtor's first name considered minor and not
misleading).
FORDHAM LAW REVIEW [Vol. 53
statement, however, correctly gives the debtor's first name and address
and is properly signed by McLaughlin. The filing officer uses the typed
name "McLaughlyn" as the basis for his alphabetical indexing. On June
10, C, a subsequent creditor, searches the files and discovers a record of
the filing. He may realize that "McLaughlin" and "McLaughlyn" are
the same person given that the first name and the address are the same.
But if C does not make the connection, despite A's negligence in mis-
spelling the name of the debtor, a court may find that a reasonably dili-
gent file searcher should not have been misled by A's error.'
183. See J.White & R. Summers, supra note 18, at 958 ("A court should not fail to ask
whether a diligent person, searching under the true name, would have been likely to have
discovered the filing."). U.C.C. 9-402(8) (1977) differentiates between "misleading" er-
rors in a financing statement, which do not negate the effectiveness of a filing, and "seri-
ously misleading" errors, which do.
184. See U.C.C. 9-402(1) (1977). There is no statutory requirement that the financ-
ing statement contain any reference to the amount of the debt obligation secured by the
collateral. See id. 9-208 official comment 2.
185. Id. 9-208(1).
186. See id.
187. Principles of estoppel can normally supplement Code provisions. Id. 1-103.
188. Section 9-204(3) permits the secured party to include a future advance clause in
the security agreement. See id. 9-204(3).
1985] HARD-TO-FIND SECURITY INTERESTS
for the prior creditor to inform the subsequent creditor of the possibility
of future advances.
A more serious type of "semi-hidden" security interest can develop if a
prior creditor decides to make uncontemplated future loans to the debtor
after a subsequent creditor has made his loan. In Example XXV, the
first creditor and the debtor contemplated the possibility of future loans
by including a future advance clause in their security agreement. As pre-
viously demonstrated, a second creditor may be able to learn about these
future contemplated loans through the section 9-208 mechanism. But
the priority rules of Article 9 also permit future uncontemplated loans to
be given the same priority as the first loan. 195
EXAMPLE XXVI: On June 1, A lends B $100,000 secured by all of
B's existing and after-acquired equipment. The security agreement, how-
ever, contains no future advance clause. On June 3, A files a financing
statement covering "equipment." The financing statement is good for
five years. 196 If subsequent creditor C searches the filings on June 10, he
will discover a record of A's prior filing. Through the section 9-208
mechanism, C learns that the outstanding debt on A's loan is $100,000.
On June 15, C decides to lend B $150,000 secured by all of B's existing
equipment. C files his financing statement on June 16. Two years later,
A and B agree on a second loan of $300,000. A and B sign a second
security agreement giving A a security interest in all of B's equipment.
Because A's filed financing statement covering B's equipment is still ef-
fective, A takes priority over C in the equipment for $400,000-the com-
bined amount of his first and second loans. 197
195. See U.C.C. 9-312 official comment 7 (1977). For illustrative case law on this
question, see In re Rivet, 299 F. Supp. 374, 377-80 (E.D. Mich. 1969). An earlier decision
holding that future advances not contemplated by the initial security agreement did not
receive the same priority as loans made under the security agreement, see Coin-O-Matic
Serv. Co. v. Rhode Island Hosp. Trust Co., 3 U.C.C. Rep. Serv. (Callaghan) 1112, 1120
(R.I. Super. 1966), was rejected by subsequent case law, see In re Rivet, 299 F. Supp. at
377, and by the drafters of the 1972 amendments to Article 9, see U.C.C. app. II, E-39 to
-41, at 896-97 (1977).
196. U.C.C. 9-403(2) (1977).
197. Section 9-316, of course, permits the subordination of priority rights by agree-
ment. See id. 9-316.
198. "Accessions" are goods that are installed or affixed to other goods, id. 9-314(1),
but that are not so commingled with these other goods so as to lose their identity, see Id.
9-314 official comment 3.
A security interest in goods which attaches before they are installed in or affixed
to other goods takes priority as to the goods installed or affixed (called in this
section "accessions") over the claims of all persons to the whole except as stated
in subsection (3) and subject to Section 9-315(1).
19851 HARD-TO-FIND SECURITY INTERESTS
Id. 9-314(1). Unless a file searcher is careful, he may overlook a prior security interest
in an "accession" to the collateral that is the subject of his search.
199. Id. 9-315.
200. See id 9-315(1)(a).
201. See id 9-315(2).
202. Id 9-306(3).
203. For example, a perfected security interest automatically continues in proceeds
beyond 10 days if "a filed financing statement covers the original collateral and the pro-
ceeds are identifiable cash proceeds." Id 9-306(3)(b). See infra Example XXVIII.
204. See supra notes 72-88 and accompanying text. See supra Examples VIII, IX.
205. U.C.C. 9-30 6 (3)(a) (1977).
FORDHAM LAW REVIEW [Vol. 53
curity interest can result unless, of course, the relevance of a prior filing
is understood.
EXAMPLE XXVIII: On June 1, A lends B $10,000 and takes a se-
curity interest in a Renoir watercolor that hangs in the waiting room of
B's office. On June 3, A files a financing statement in the Secretary of
State's office describing tb. "'quipment collateral as a "Renoir watercolor
entitled 'The Opera.'" O1 June 15, B trades the Renoir watercolor for a
Whistler etching which B also hangs in his waiting room. The Whistler is
the proceeds collateral of the original collateral, the Renoir.2 0 6 If C, a
subsequent secured creditor of B, searches the files on June 30 to see if
the Whistler is already encumbered, he will discover A's prior filing as to
the Renoir watercolor entitled "The Opera." Because the Whistler is also
equipment and constitutes proceeds of the Renoir, the filing covering the
Renoir is good as to the Whistler.2 "7 Unless C makes this connection, he
may lend to B and find that his security interest in the Whistler is
subordinate to A's.
With respect to semi-hidden security interests such as those described
in Examples XXVII and XXVIII, the problem will disappear if the file
searcher makes the necessary connection between the prior filing and the
present situation. It may, however, be easier to put the two pieces of the
puzzle together in the case of commingled goods than in the case of pro-
ceeds collateral. Assuming he is careful and attentive, a file searcher
should be able to connect a prior raw materials filing with a subsequent
security interest in finished goods. In the case of proceeds, however, he
may find it more difficult to solve the puzzle. As Example XXVIII
shows, a Whistler etching may be the proceeds of a Renoir painting if the
debtor trades the one for the other. If the prior filing lists the collateral
as a Renoir painting, the connection between it and the Whistler will not
be readily apparent. Normally, however, the average commercial lender
should not encounter these "in kind" trades of collateral and thus should
not be injured by these semi-hidden security interests in proceeds.
206. See id. 9-306(1). The Whistler was "received upon the ... exchange ... of
collateral." Id.
207. See id. 9-306(3)(a) (as long as a filing as to original and proceeds collateral
would be made in same filing office, filing as to original collateral is good with respect to
proceeds collateral).
208. See U.C.C. 9-203 (1977).
1985] HARD-TO-FIND SECURITY INTERESTS
209. See ia 9-312(3), (4). 9-313(4)(a). On the "second in time" rights of purchase
money lenders, see J. White & R. Summers, supra note 18, at 1042-52.
210. See U.C.C. 9-312(4) (1977). The Code permits a creditor to take a security
interest in after-acquired property. See id 9-204(l). After-acquired property interests,
however, are limited with respect to consumer goods. L 9-204(2).
211. For example, so-called "add on" clauses may destroy purchase money status. See
McLaughlin, supra note 83, at 662.
212. See U.C.C. 9-107 (1977).
213. Since the first creditor has an after-acquired property clause in his security agree-
ment, he will take a security interest in the new purchase money collateral but it will be a
FORDHAM LAW REVIEW [Vol. 53
represents a comprehensive study of "non-UCC recorded," "unre-
corded" and "hidden" security interests, it does not claim to be an ex-
haustive study. The perfection and priority rules of Article 9 are
complex, and new variations of the examples discussed in this Article
frequently surface. Consider the following example, a rather unusual
form of "hidden" security interest that is present in a priority dispute
described by Professor Henson in a recent article.2 14
EXAMPLE XXX: On June 1, A files a financing statement covering
all of manufacturer B's inventory of widgets. C is a retailer who sells
widgets. On June 10, B and C sign a contract whereby C agrees to buy
50,000 widgets from manufacturer B. On this same day (June 10), B
crates 50,000 widgets and puts them in his warehouse for shipment to C
on August 15. On June 20, C borrows $100,000 from D and gives D a
security interest in his inventory. D searches the Article 9 filings and
discovers no prior filing as to C's inventory on June 20. D files his fi-
nancing statement on June 20. Because the 50,000 widgets in B's ware-
house were "identified" to the B-C contract on June 10, C acquired a
"special property" in the widgets as of this date.2 15 This "special prop-
erty" meant that C had rights in the collateral and thus as of June 20, D's
perfected security interest in C's inventory attached to the widgets still in
B's warehouse. But on June 20, A's perfected security interest in B's
inventory still covered the 50,000 widgets. According to Section 9-
307(1) of the Code, C will buy free of A's perfected security interest
when he qualifies as a "buyer in ordinary course."21 6 But C cannot be-
come a buyer in ordinary course until there has been a "sale" of the
widgets. UCC section 9-105(3) incorporates the Article 2 definition of
sale-"the passing of title from the seller to the buyer for a price" 2 7'-for
use in Article 9. z21 Thus, there cannot be a sale, and C cannot become a
buyer in ordinary course, until title to the widgets passes to C.2 19 In the
absence of an agreement to the contrary, "title passes to the buyer at the
time and place at which the seller completes his performance with refer-
ence to the physical delivery of the goods. ' 220 Under the facts, this will
not occur until August 15. Thus, between June 20 and August 15, both
second in time, nonpurchase money security interest. See id. 9-312(3), (4). Still, it is
clear that the first creditor has benefited.
214. See Henson, Some Problems Involving Documents of Title, 43 Ohio St. L.J. 585,
589-90 (1982).
215. See U.C.C. 2-401(1), 2-501(1) (1977).
216. See id. 9-307(1) (1977). There could be an alternate course of analysis. If A
had authorized the sale of the widgets from B to C, C would take free of A's security
interest under 9-306(2), but only after the goods had been sold to C. Thus, the 9-
306(2) and 9-307(1) analyses both hinge on when the B-C sale occurs.
217. Id. 2-106.
218. See id. 9-105(3).
219. See Kinetics Technology Int'l Corp. v. Fourth Nat'l Bank, 705 F.2d 396, 402, 36
U.C.C. Rep. Serv. (Callaghan) 292, 301-02 (10th Cir. 1983), as to when a "sale" takes
place for the purposes of Article 9.
220. U.C.C. 2-401(2) (1977).
1985] HARD-TO-FIND SECURITY INTERESTS
A, as B's creditor, and D, as C's creditor, can both claim perfected secur-
ity interests in the 50,000 widgets in B's warehouse. The Code does not
contain any rule that states which of these two security interests should
take precedence over the other."
CONCLUSION
Parts I, II and III of this Article discussed numerous examples of
"non-UCC recorded," "unrecorded" and "hidden" security interests tol-
erated by the Article 9 filing system. In addition, the analysis focused on
ways either to discover the existence of these "problem" security inter-
ests or, when that is impossible, to neutralize, or at least minimize, their
effect on subsequent lenders. In this regard, prefiling loan deferral and
tightly drafted representations and warranties given by the debtor are
important protective measures. As a further protective device, a lender
may ask debtor's counsel to render an opinion as to the lender's first
priority in the collateral.' If the opinion is given, debtor's counsel typi-
cally will include a list of exceptions to his opinion.' Even though nar-
row, the opinion will give the sophisticated lender a true picture of the
risks he is taking and will, in combination with the other measures men-
tioned throughout the Article, presumably give the lender the most com-
plete protection available.
221. See Henson, supra note 214, at 590.
222. See Ryan, supra note 5, at 179-93.
223. For some suggested exceptions in an opinion of debtor's counsel, see id. at 181-83.