Bill 236

                    Current Status

Bill Number:               236
Ratification Number:       551
Act Number                 494
Introducing Body:          Senate
Subject:                   Relating to the application of the
                           Uniform Commercial Code

(A494, R551, S236)

AN ACT TO AMEND SECTION 36-1-105, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO THE APPLICATION OF THE UNIFORM COMMERCIAL CODE, SO AS TO FURTHER PROVIDE FOR THIS APPLICATION; TO AMEND SECTION 36-1-201, RELATING TO DEFINITIONS UNDER THE UNIFORM COMMERCIAL CODE, SO AS TO REVISE THE DEFINITIONS OF "BUYER IN ORDINARY COURSE OF BUSINESS" AND "SECURITY INTEREST"; TO AMEND SECTION 36-2-107, RELATING TO GOODS TO BE SEVERED FROM REALTY, SO AS TO PROVIDE THAT TIMBER SHALL BE TREATED AS GOODS INSTEAD OF REAL ESTATE UNDER THE SECTION; TO AMEND SECTION 36-5-116, RELATING TO TRANSFER AND ASSIGNMENT, SO AS TO INCLUDE CONTRACT RIGHTS IN THE DEFINITION OF AN ACCOUNT; TO AMEND CHAPTER 9 OF TITLE 36, RELATING TO SECURED TRANSACTIONS, SO AS TO REVISE THE PROVISIONS OF THE CHAPTER; TO AMEND CHAPTER 10 OF TITLE 36, RELATING TO THE EFFECTIVE DATE OF THE UNIFORM COMMERCIAL CODE, SO AS TO FURTHER PROVIDE FOR THE EFFECTIVE DATE OF THE INITIALLY ENACTED UNIFORM COMMERCIAL CODE; TO AMEND TITLE 36 BY ADDING CHAPTER 11 SO AS TO PROVIDE TRANSITION PROVISIONS FOR AND THE EFFECTIVE DATE OF THE AMENDMENTS TO THE UNIFORM COMMERCIAL CODE AS CONTAINED IN THIS ACT; TO AMEND SECTIONS 15-3-520, 29-3-310, 29-3-330, 29-3-340, 29-3-350, 29-3-360, 29-3-390, 29-3-400, 29-3-470, 30-5-30, 30-7-10, 30-7-60, 30-7-70, 30-7-80, 30-9-30, 30-9-40, AND 30-11-20 SO AS TO FURTHER PROVIDE FOR THESE SECTIONS IN CONJUNCTION WITH THE AMENDMENTS TO THE UNIFORM COMMERCIAL CODE AS CONTAINED HEREIN; AND TO REPEAL SECTIONS 27-23-80, 27-39-50, 27-39-260, 30-5-160, 30-5-170, 33-9-130, 56-19-640, AND 56-19-690 OF THE 1976 CODE AND SECTIONS 8-181 THROUGH 8-200, 8-211 THROUGH 8-215, 8-801 THROUGH 8-1076, 8-1081 THROUGH 8-1108, 11-103, 11-201 THROUGH 11-206, 12-17.1 THROUGH 12-17.25, 27-56.1, 27-61.1, 27-62, 27-63, 27-64, 27-64.1, 27-64.2, 27-65, 27-66.1, 45-151, 45-152, 45-158, 45-161, 45-162, 45-163, 45-164, 45-201 THROUGH 45-211, 45-401 THROUGH 45-410, 60-64.1, 60-301, 60-302, 60-302.1, 60-303, 60-304, 60-305, 60-306, 60-306.1, 60-307, 60-308, 60-309, 60-310, AND 60-311 OF THE 1962 CODE.

Whereas, the General Assembly by this act is revising various provisions of law relating to the Uniform Commercial Code; and
Whereas, the General Assembly recognizes the impact the changes will have in South Carolina and the need of the judiciary, bar, and those persons engaged in commercial trade to be familiar with and understand the changes; and
Whereas, the General Assembly believes that an examination of the introduction to these revisions prepared by Professor Harry J. Haynsworth of the University of South Carolina School of Law, who served as the South Carolina Reporter for these proposed amendments, will greatly facilitate an understanding of this act; and
Whereas, for the above reasons, the General Assembly has decided to include Professor Haynsworth's Introduction as a background and explanation of the major changes made by this act.
Introduction
Every state with the exception of Louisiana has adopted the Uniform Commercial Code (UCC). South
Carolina enacted the UCC in 1966, effective January 1, 1968. The UCC is by far the most significant and successful of the Uniform Acts proposed by the National Conference of Commissioners on Uniform State Laws. On the whole, it has achieved to a remarkable degree its underlying goals of simplifying, clarifying, and modernizing commercial law on a uniform basis throughout the United States.
  In 1961, the American Law Institute and the National Conference of Commissioners on Uniform State laws, the original sponsors of the UCC, created the Permanent Editorial Board for the Uniform Commercial Code. The Permanent Editorial
Board's function is to review the operation of the Code and other legal developments in commercial law and to make recommendations for changes in the Official Text of the Code. In 1962 major revisions to the entire UCC were approved by the Permanent Editorial Board and the sponsoring agencies. This revision, which became known as the 1962 Official Text, was the Text that was enacted in most states, including South Carolina. Some additional amendments were recommended for adoption in 1966 but for the most
part these 1966 recommendations were not included
in the UCC legislation adopted in South Carolina as Act 1065 of 1966.
  Nonuniform, nonofficial amendments of the UCC by the various states have been continuously scrutinized by the Permanent Editorial Board and most of these amendments have been rejected as being unnecessary and destructive of the uniformity principle undergirding the whole Code. Article 9 of the UCC, which regulates secured transactions, produced the most amendments (in South Carolina, however, the General Assembly made more amendments in Article 2, dealing with sales of goods, than in any other
article). In 1966 the Permanent Editorial Board,
after concluding that the existence of such a large number of unapproved amendments justified a complete review of Article 9, established the Article 9 Review Committee. This Committee was composed of leading practitioners, judges, and law professors. The late Robert Braucher, Professor at Harvard Law School, was the
Reporter and Professor Homer Kripke of New York University Law School served as Associate Reporter. Professor Grant Gilmore of Yale and Peter Coogan, a prominent practitioner-scholar from Boston, served as consultants to the Committee.
  The Article 9 Review Committee completed its work in 1970 and a proposed revision of Article 9 and corresponding amendments in Articles 1, 2, and 5 were approved by the Permanent Editorial Board in 1971. Following approval by the American Law Institute, the National Conference of Commissioners on Uniform State Laws, and the American Bar Association, the revised text, known technically as the 1972 Official Text and referred to in this act as the 1988 UCC Amendments, was submitted to the states for adoption. By the end of 1984, at least forty-two states, including several southern states, have adopted the revised text. They are: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. It has been submitted for legislative approval in several other states and unless some unexpected problems arise, the process of adoption nationwide should be concluded in the next few years.
  The revisions in Article 9 made by the 1988 UCC Amendments are extensive but, for the most part, they consist of clarifying amendments designed to overcome specific cases or problems which have developed under the 1962 Text, the Text that was used as the basis for Act 1065 of 1966. It will after this be referred to as the 1966 UCC. Two major provisions of the 1966 UCC, Section 36-9-103, which regulates multistate secured transactions, and Section 36-9-313, dealing with fixtures, have in practice produced the most serious problems and have been completely rewritten. The revisions contain significant substantive law changes. Additionally, Section 36-9-312, which contains the basic priority rules, has been extensively revised to incorporate more completely the unitary security interest theory and to overcome some of the drafting deficiencies and possible gaps in the 1966 UCC. Substantial changes designed to simplify the perfection process, especially with respect to the filing provisions, have also been made. For example, it will no longer be necessary for the secured party to sign the UCC-1 financing statement, nor will it be necessary to claim proceeds in the security agreement or financing statement. Additional changes ensure that security interests in items such as fixtures, standing timber, and minerals that can affect the title to real estate will be indexed in the real estate mortgage records in the name of the debtor, and if the debtor is not the owner of record, the owner as well. These and the other major changes are summarized in the remainder of this Introduction.
Part 1
Short Title, Applicability, and Definitions
  The most significant changes in Part 1 of Article 9 made by the 1988 UCC Amendments involve the modifications in the rules with respect to secured transactions that have a relation with more than one state. The basic rules for the transactions are in Section 36-9-103, which has been completely rewritten. Related provisions are contained in Sections 36-9-102 and 36-9-105, both of which have been modified by the 1988 UCC Amendments to make it clear that Section 36-9-103 governs the perfection and effects of perfection of security interests in multistate transactions; however, other aspects of the transactions, such as rights upon default, will be governed by the normal conflicts rules in Section 36-1-105. (See the South Carolina Reporter's Notes to Section 36-1-105 found in Section 5 of this act.)
  Major substantive changes made in revised Section 36-9-103 include: (1) the treatment of automobiles and other goods where security interests are noted on certificates of title; (2) a new rule requiring that financing statements covering accounts and general intangibles be filed in the state of the debtor's location, which in the case of more than one place of business is the state where the chief place of business is located; and (3) a new rule that perfection of security interests in minerals and the like (including oil and gas) or in accounts arising from the sale of minerals will be governed by the laws of the state where the wellhead or minehead is located.
  The continued effectiveness of security interests in automobiles moved from one state to another under Section 36-9-103 of the 1966 UCC has been the subject of an inordinate amount of litigation. The new rules, explained in the Official Comments and South Carolina Reporter's Notes to revised Section 36-9-103 in Section 5 of this act, appear to resolve in a satisfactory manner many of the common problems that have arisen under the present wording.
  The requirement in subsections (1) and (2) of the 1966 UCC that financing statements perfecting security interests in accounts (and contract rights, which as is pointed out below have been eliminated as a separate form of collateral in the 1988 UCC Amendments) be filed in the state where records concerning them are kept, whereas financing statements perfecting security interests in general intangibles are to be filed in the state where the debtor's chief place of business is located, simply made no sense commercially. This was especially true in cases such as factoring where the debtor may not keep records concerning the accounts assigned to the factor anywhere. In addition, the distinction between accounts and general intangibles is sometimes difficult to determine and the necessity of dual filing in these situations is an unnecessary expense. Determining the debtor's chief executive office, which is the place of filing specified for both accounts and general intangibles under the 1988 UCC Amendments, should be easier than determining the state where certain records are located or the debtor's chief place of business.
  Finally, the treatment of security interests in minerals under the 1966 UCC is at best unclear. The new rules in revised Section 36-9-103, together with corresponding changes in other sections of the 1988 UCC Amendments (See Sections 36-9-401 through 36-9-403), which make it clear that security interests in minerals as goods will be indexed in the chain of title of the record owner of the realty on which the well or mine is located, resolve most of the existing uncertainty in this area.
  An additional important change in Part 1 is the elimination of contract rights as a separate form of collateral and the inclusion of what were defined as contract rights in the 1966 UCC in the new definition of accounts found in revised Section 36-9-106. The distinction between the two forms of collateral is an artificial one and has produced a number of serious problems that will be eliminated by merging the two concepts. This change requires corresponding changes in a number of other sections, including Section 36-1-201 (37) and 36-5-116.
  A new Section 36-9-114 imposes notice requirements by consignors to creditors of consignees with perfected security interests if the consignor wants priority over these other interests. These notice provisions are similar to those required under Section 36-9-312 (3) for priority by a purchase money inventory financer over other secured parties claiming a security interest in the debtor's inventory. It is worth noting that these notice requirements are in addition to any filing requirements imposed on consignors by Section 36-2-236 of the 1966 UCC.
  Although there are a number of revisions in Section 36-9-104, which deal with transactions that are excluded from Article 9, and Section 36-9-105, which contains the basic definitions utilized in Article 9, most of these are minor or implement other modifications made elsewhere in the 1988 UCC Amendments. A few of these changes, however, merit some comment.
  First, the exclusion of an equipment trust covering railway rolling stock contained in Section 36-9-104(e) of the 1966 UCC has been eliminated. Under the 1988 UCC Amendments such trusts, like other security interests in personalty owned by railroads, will be governed by Article 9, with the exception that perfection of security interests in railroad rolling stock will be made pursuant to federal statute [49 U. S. C. Section 20(c)]. [See Section 36-9-302(a) found in Section 5 of this act.]
  Second, a new exclusion for any transfers by a government or governmental subdivision or agency has been added [See Section 36-9-104(e) in Section 5 of this act]. This will eliminate any possibility that state and local bond issues will involve security interests that are governed by Article 9. The status of such bonds under the 1966 UCC has been unclear.
  Third, the definition of chattel paper in Section 36-9-105(b) specifically excludes a vessel charter contract from qualifying as
chattel paper. Instead, security interests in charter contracts are included in the definition of accounts in Section 36-9-106. Actually, these changes were first recommended for adoption in 1966 but they were not included in the version of the UCC adopted by South Carolina. In order to avoid any confusion concerning the status of charter contracts (See the South Carolina Reporter's Notes to revised Section 36-9-105 in Section 5 of this act for an explanation of the reason for classifying them as accounts rather than chattel paper), these changes are included in this act.
  Fourth, the definition of goods in Section 36-9-105(h) of the 1988 UCC Amendments [Section 36-9-105(f) of the 1966 UCC] has been broadened to include standing timber to be cut and removed under a conveyance or contract of sale. Financing of the contracts is easier if the timber is treated as goods rather than real estate (which is the case under the 1966 UCC). Financing statements like those required for fixtures are required to be filed and indexed in the real estate records in order to perfect a security interest in standing timber qualifying for this treatment. Therefore a person checking the title of the record owner of the underlying real estate will have record notice of any security interest in the timber. Several other sections in the UCC have been modified to implement this revised treatment of standing timber, including Sections 36-2-107 and 36-9-401 through 36-9-403.
  Finally, the definition of goods has also been modified to make it clear that an Article 9 security interest in minerals (including oil and gas) as goods cannot exist prior to the time the minerals are extracted. Additional changes have been made in Part 4 of Article 9 to require that perfection of any security interests in minerals includes a description of the real estate and be indexed in the real estate mortgage records (See
revised Sections 36-9-401 through 36-9-403 in Section 5 of this act), and in revised Section 36-9-103, which makes it clear for the first time that security interests in minerals are considered to have been created at the place where the wellhead or minehead is located [See Section 36-9-103(5) in Section 5 of this act]. These provisions will ensure that all financing statements covering minerals will uniformly be made in the county where the wellhead or minehead is located and will be indexed in the chain of title of the record owner of the real estate.
Part 2
Validity of Security Agreement
Rights of Parties Thereto
  The most significant change made in Part 2 of Article 9, is a redrafting of Sections 36-9-203 and 36-9-204 of the 1966 UCC so that all the elements of enforcement and attachment are in new Section 36-9-203. This avoids the possibility of having a security agreement that meets the technical attachment requirements of existing Section 36-9-204 and in which all necessary steps for perfecting the security interest have been taken nevertheless being held to be unenforceable because the agreement is not in writing as required by Section 36-9-203 of the 1966 UCC.
  A second change of significance in Part 2 is the simplification of the after acquired property and future advance provisions in Section 36-9-204. For example, the limitation on security interests in future crops was deleted altogether on the grounds that the existing restriction [one year in the Official Text and seven years in the 1966 UCC - Section 36-9-204(4)(a) of the 1976 Code] failed to accomplish any legitimate financing policy.
Part 3
Perfection and Priorities
  The most significant changes in Part 3 of Article 9, which deals with the problems of perfection and priority of security interests, are in Sections 36-9-312 and 36-9-313. The 1988 UCC Amendments also make several important revisions in Section 36-9-306, the basic proceeds section.
  Section 36-9-312 establishes the basic rules for priority between competing security interests in the same collateral. Several modifications have been made in the notice requirements for a purchase money inventory financer who wishes to obtain priority over prior secured parties claiming a security interest in the inventory under Section 36-9-312(3). Under the revisions the required notice need only be sent to persons with prior filed financing statements, and once the notice is given it is valid for all subsequent purchase money shipments of inventory for five years. Under the 1966 UCC the notice has to be sent to all secured parties who were known to the purchase money financer, even those who had unperfected security interests in the debtor's inventory, and it is unclear how long the notice is effective. An additional change makes it clear that to qualify for the special purchase money priority, the notice, which must be in writing (the 1966 UCC does not specifically so state), must be received by the prior secured parties before the goods being financed by the purchase money financer are received by the debtor in all cases, including situations where documents are involved and the secured party has a temporary twenty-one day security interest in the goods under the provisions of Section 36-9-304(4) and (5). These changes resolve the major problem areas that exist under the wording of Section 36-9-312(3) in the 1966 UCC.
  Significant modifications are also made in the other priority rules in Section 36-9-312. Basically, these changes implement to a greater extent than does the 1966 UCC a unified security interest concept under which priority, other than in cases involving purchase money security interests, is based on the first to perfect rule, regardless of how the original security interest was perfected. One major controversy clarified by these new rules is the respective priorities in the debtor's accounts of an accounts receivable financer and an inventory financer claiming an interest in the accounts as proceeds when both financers have perfected security interests. Under new subsection (5) the first financer to file as to the accounts either as original collateral or as proceeds will have priority. In addition subsections (6) and (7) of the 1988 UCC Amendments make it clear that for priority purposes the security interest in proceeds relates back to the date of perfection as to the original collateral and the security interest for future advances relates back to the original advance. All of these changes resolve major problems that have developed under the wording of this section in the 1966 UCC.
  Section 36-9-313, which deals with the respective priorities of a fixture financer and persons claiming an interest in the real estate where the fixtures are located, has been completely rewritten. The two most significant changes from the 1966 UCC are (1) provisions that with certain reasonable exceptions require fixture filings to be indexed in the real estate mortgage records with indexing in the name of the record owner as well as the debtor if the record owner is not the debtor; and (2) new subsection (6) which gives a construction mortgagee priority over even a fully perfected purchase money security interest in fixtures. The revisions were drafted to meet the legitimate objections by real estate interests to the 1966 UCC treatment of fixtures. Although the new rules are somewhat complex, they provide an adequate amount of record notice to persons claiming an interest in the real estate and at the same time provide fixture financers with specific rules for determining their priority rights.
  The provisions with respect to proceeds have been modified as follows: (1) under the 1988 UCC Amendments it will no longer be necessary to claim a security interest in proceeds either in the security agreement or the financing statement; (2) insurance paid as a result of loss or damage to collateral is specifically included in the definition of proceeds in revised Section 36-9-306(1); and (3) the perfection rules as to proceeds are changed to provide that to have a perfected security interest in proceeds beyond ten days after their receipt, the secured party must have taken action that would give reasonable notice to a potential creditor of the debtor that the secured party has a security interest in the same collateral that the new creditor desires to have covered by his security interest. These new rules will require more broadly worded financing statements, and in some cases additional filings or possession of the proceeds, but overall the new provisions are more precise than the existing rules and compliance will not be overly burdensome.
  The following is a brief summary of the other major modifications in Part 3: (1) the effect of knowledge by a lien creditor of an unperfected security interest is deleted from Section 36-9-301; (2) the exemption from filing for farm equipment costing less than twenty-five hundred dollars in Section 36-9-302 has been eliminated on the grounds that it actually hurt rather than helped farmers to obtain needed credit; (3) revised Section 36-9-302 adds two new exemptions to the filing requirements, one for assignments of beneficial interests in trusts and estates and the second for assignments for the benefit of creditors; (4) revised Section 36-9-304 makes it clear that perfection of a security interest in money can only be obtained by possession of the money; (5) the holder of a negotiable instrument who cannot qualify as a holder in due course is given the same rights as a purchaser of chattel paper under revised Section 36-9-308; and (6) the effect of future advances on the rights of judgment lien creditors and purchasers of goods, who take subject to a security interest when the advances are made after the lien creditor or purchaser acquire rights in the property in question, are clarified by revised Sections 36-9-301(4) and 36-9-307(3).
Part 4
Filing
  The changes in the filing provisions of Article 9 are for the most part designed to overcome specific problems that have developed under the 1966 UCC. The three most significant changes are: (1) the elimination of the necessity of the secured party's signature on the UCC-1 financing statement; (2) the requirement that fixture financing statements be indexed in the real estate mortgage records under the name of the debtor and also under the name of the record owner of the property if the debtor is not the record owner; and (3) a requirement that whenever a change in the name or identity of a debtor makes a filed financing statement seriously misleading, a new financing statement (which can be signed solely by the secured party) showing the new or revised name of the debtor must be filed in order to perfect a security interest in new collateral acquired by the debtor more than four months after the event in question.
  Several other changes in Part 4 revolve around these provisions. For example, the elimination of the secured party's signature on financing statements (it is still necessary for amended financing statements) makes it more likely that a typical security agreement or real estate mortgage will meet the technical requirements of a financing statement. In this connection, the 1988 UCC Amendments specifically provide that a real estate mortgage can serve as a fixture filing and that if it does, the filing is effective for the life or satisfaction of the mortgage rather than five years, the expiration date for regular financing statements. [See Sections 36-9-402(6) and 36-9-403(5) in Section 5 of this act.] In addition, the 1988 UCC Amendments contain provisions that treat security interests in standing timber to be cut under a contract or deed and in minerals or the like (including oil and gas) essentially the same as fixtures as far as the requirements for the content and filing of financing statements are concerned. [See Sections 36-9-402(5) and 36-9-403(7) in Section 5 of this act.]
  One of the primary purposes of all these changes in fixture and related types of filings is to ensure that a person checking the real estate records will be able to locate security interests that affect the title to real estate. Under the 1966 UCC the lack of a requirement that financing statements had to be indexed in the name of the record owner when the debtor was not the record owner means that a person checking the real estate records in the name of the owner cannot be sure he has located all fixture filings unless he checks in the indexes the names of all tenants or other persons
occupying the land who could have granted security interests.
  Another purpose of the changes in the filing requirements for fixtures and related filings is to simplify the filing procedures. Approval of the use of a real estate mortgage as a fixture filing is one example of this simplification. A related change is authorization of a single filing in the office of the Secretary of State for fixtures of a transmitting utility rather than requiring fixture filings in every county where the utility has fixtures, which is required under the 1966 UCC. In this connection, another change in the 1988 UCC Amendments makes a financing statement against a transmitting utility effective until terminated, thereby decreasing the cost and frequency of the filings. Since the definition of a transmitting utility includes railroads, these new provisions will make unnecessary the special filing provisions for railroads and certain other public utilities included as part of existing Sections 36-9-302(3)(b) and 36-9-403(3) of the 1976 South Carolina Code. (See paragraph 2 of the South Carolina Reporter's Notes to revised Section 36-9-403 in Section 5 of this act.)
  The filing fees specified in the 1966 Code, as amended, (most recently by Act 201 of 1985, Part II, Section 7) are continued; but in some circumstances, for example for fixture filings and a request for indexing in more than one name, special fees generally in an amount of two dollars are authorized. [See Sections 36-9-403(5), 36-9-404(3), 36-9-405(1) and (2), 36-9-406 and 36-9-407(2) of the 1986 Amendments in Section 5 of this act.]
  All of the changes made in the filing provisions by the 1988 UCC Amendments are discussed in detail in the Reporter's Notes to each section. In addition to the provisions discussed above, one change of particular interest is new Section 36-9-408, which
authorizes a "safe harbor" type of a modified financing statement to be filed in situations involving consignments and leases of personal property. It is frequently difficult to determine with certainty whether a contract is a true lease or consignment or will be held to be a sale involving a security interest in the leased or consigned goods. Filing a standard financing statement in these uncertain situations increases the likelihood that a court will find the transaction to be a secured sale. New Section 36-9-408 specifically states that a financing statement filed pursuant to the section is precautionary and cannot be used as evidence that the transaction is not a true lease or consignment. In this connection, Section 27-23-80 of the 1976 Code, which makes any lease or consignment void as to subsequent creditors unless a financing statement showing the interest of the lessor or consignor is properly filed, is repealed. (See Section 9 of this act.)
Part 5
Default
  The only substantive change of any significance in the default provisions of Article 9 made by the 1988 UCC Amendments involves the number of persons who are entitled to notice of disposition of collateral after the debtor's default. Under the 1966 UCC, in addition to notifying the debtor, except in cases involving consumer goods, notice of the proposed disposition must be given to any secured party who has filed a financing statement covering the same collateral and also to any person "who is known by the secured party to have a security interest in the collateral". The latter requirement has proven to be quite troublesome because it requires notification to persons having unfiled and unperfected security interests in the secured party's collateral, if one of the secured party's agents happens to come across evidence that such a security interest exists. Since failure to comply with the notice requirements can result in a judgment against the secured party for damages under Section 36-9-507, the risks of noncompliance are high. The 1988 UCC Amendments require that the only persons other than the debtor entitled to notice are persons who have notified the secured party in writing of their claim in the collateral. This written notice must be given before the secured party has notified the debtor of the proposed disposition or before the debtor has renounced his interest in the collateral. Thus the revisions significantly reduce the number of persons that are entitled to notice and also reduce the likelihood that a secured party will inadvertently fail to give all required notices.
  One persistent problem with the default provisions of the 1966 UCC has been the amount of litigation over the procedures followed by secured parties in making public or private sales of collateral. The 1966 UCC merely requires that "reasonable" notice must be given and any sale must be "commercially reasonable" but does not specify the content or timing of the notice or the bid or other requirements of a public or private sale. If a court later determines that the procedures followed were not "commercially reasonable", the secured party is subject to liability for damages and other penalties under Section 36-9-507. The only "safe harbor" under the 1966 UCC is a provision in Section 36-9-507(2) that any disposition of collateral that has been judicially approved will conclusively be considered to be "commercially reasonable". However, a judicially approved sale adds to the sale expenses and involves considerable delay in
effecting a final sale. In order to provide secured parties with some additional certainty, a new Part 6 has been added to Article 9 in the 1988 UCC Amendments. It sets out the requirements for notices and other procedural requirements for nonjudicial public sales of collateral and provides that a public sale that substantially complies with this statute is conclusively "commercially reasonable". These provisions do not affect private sales which will still be subject to the "commercially reasonable" test in the Code. Similar provisions in the North Carolina UCC have apparently worked satisfactorily.
Articles 10 and 11
  When South Carolina enacted the UCC in 1966, the specific repealer section in the Official Text was omitted. The only provisions dealing with repealed or amended statutes was a general repealer, Section 36-10-103, which provides that "all acts and parts of acts inconsistent with this act are hereby repealed". It is difficult in many cases to determine what statutes are "inconsistent" with the UCC and the absence of a specific repealer section has caused a number of problems for lawyers dealing with the Code. For example, a strong argument can be made that Section 27-23-80 of the 1976 South Carolina Code, which requires the recording of consignments and leases of personal property, is inconsistent with the 1966 UCC and therefore was repealed. However, one case held that this section is not inconsistent with the UCC and hence was not repealed because it deals with true leases and consignments whereas the UCC only deals with security interests. In re Bazen, 425 F. Supp. 1184 (D.S.C.), aff'd. 571 F. 2d 474 (4th Cir. 1977).
  When the 1976 South Carolina Code was adopted, many "inconsistent" statutes were not included
in the 1976 Code on the grounds that they had been repealed by implication when the 1966 UCC was enacted. However, not all of the South Carolina Code sections that should have been repealed or amended by the UCC were omitted or amended in the 1976 Code. In order to clarify this situation Section 8 of this act contains a list of all the sections of the 1976 Code that are amended by the 1966 UCC and the 1988 UCC Amendments. Section 9 contains a list of all the sections of the 1962 and 1976 Codes that are repealed as being inconsistent with the South Carolina UCC.
  Section 7 of this act also adds a new Chapter (Article) 11 to the UCC. Chapter 11 contains transitional provisions for dealing with the problems that might arise with respect to transactions governed by the 1966 UCC that were consummated prior to the effective date of the 1988 UCC Amendments. For example, new Section 36-11-103 provides that all perfected security interests remain automatically perfected after the effective date of the 1988 UCC Amendments and may be enforced under the provisions of the 1988 UCC Amendments. In addition, any changes in the 1988 UCC Amendments which allow perfection of a security interest that would be unperfected under the 1966 UCC, will automatically create a perfected security interest as of the effective date of the 1988 UCC Amendments. For example, a real estate mortgage filed before the effective date of the 1988 UCC Amendments cannot, in the absence of a signature by the mortgagee, satisfy the requirements of a fixture filing, but under new Section 36-11-105(4) such a mortgage will automatically qualify as a fixture filing on the effective date of the 1988 UCC Amendments since under the revisions the secured party's signature is not required on a financing statement, and a real estate mortgage can qualify as a fixture filing.
Review by South Carolina Bar and the
South Carolina Judicial Council
  The South Carolina Bar Commercial Law Committee conducted a detailed section by section analysis of the 1988 UCC Amendments. Following its review, the committee approved the amendments with three recommended changes in Sections 36-9-301(4), 36-9-307(3) and 36-9-404. The committee's report was subsequently approved by the South Carolina Bar Board of Governors and House of Delegates.
  The South Carolina Judicial Council also reviewed the 1988 UCC Amendments and adopted a favorable endorsement which contained the same three changes recommended by the South Carolina Bar Commercial Law Committee.
  The act incorporates the changes recommended by the Judicial Council and the South Carolina Bar.
Other
  The Official Comments and South Carolina Reporter's Notes following each section of the UCC in this act do not contain the prefix "36" (e.g. Section 9-301) when referring to specific UCC sections and also refer to the various articles of the UCC as "Articles" rather than as Chapters (e. g. Article 9 rather than Chapter 9). These references are to the 1962 and 1972 Official Texts of the UCC. However, Act 1065 of 1966, which enacted the UCC into law in South Carolina, was later codified as Title 36 of the South Carolina Code of Laws of 1976, and therefore each section of the UCC as contained in the actual 1976 South Carolina Code does contain the prefix "36" and the various articles are properly referred to as "chapters". Now, therefore,
Be it enacted by the General Assembly of the State of South Carolina:
Territorial application of Uniform Commercial Code
SECTION 1. Section 36-1-105 of the 1976 Code is amended to read:
  "Section 36-1-105. Territorial application of the title; parties' power to choose applicable law.
  (1) Except as provided in this section, when a transaction bears a reasonable relation to this State and also to another state or nation the parties may agree that the law either of this State or of another state or nation shall govern their rights and duties. Failing an agreement this title applies to transactions bearing an appropriate relation to this State.
  (2) Where one of the following provisions of this title specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law (including the conflict of laws rules) so specified:
  Rights of seller's creditors against sold goods. Section 36-2-402.
  Applicability of the Chapter on Bank Deposits and Collections. Section 36-4-102.
  Bulk transfers subject to the Chapter on Bulk Transfers. Section 36-6-102.
  Applicability of the Chapter on Investment Securities. Section 36-8-106.
  Perfection provisions of the Chapter on Secured Transactions. Section 36-9-103."
OFFICIAL COMMENT
Prior Uniform Statutory Provision: None
Purposes: 1. Subsection (1) states affirmatively the right of the parties to a
multistate transaction or a transaction involving foreign trade to choose their own law. That right is subject to the firm rules stated in the five sections listed in subsection (2), and is limited to jurisdictions to which the transaction bears a "reasonable relation". In general, the test of "reasonable relation" is similar to that laid down by the Supreme Court in Seeman v. Philadelphia Warehouse Co., 274 U.S. 403, 47 S. Ct. 626, 71 L. Ed. 1123 (1927). Ordinarily the law chosen must be that of a jurisdiction where a significant enough portion of the making or performance of the contract is to occur or occurs. But an agreement as to choice of law may sometimes take effect as a shorthand expression of the intent of the parties as to matters governed by their agreement, even though the transaction has no significant contact with the jurisdiction chosen.
  2. Where there is no agreement as to the governing law, the act is applicable to any transaction having an "appropriate" relation to any state which enacts it. Of course, the act applies to any transaction which takes place in its entirety in a state which has enacted the act. But the mere fact that suit is brought in a state does not make it appropriate to apply the substantive law of that state. Cases where a relation to the enacting state is not "appropriate" include, for example, those where the parties have clearly contracted on the basis of some other law, as where the law of the place of contracting and the law of the place of contemplated performance are the same and are contrary to the law under the code.
  3. Where a transaction has significant contacts with a state which has enacted the act and also with other jurisdictions, the question what relation is "appropriate" is left to judicial decision. In deciding that question, the court is not strictly bound by precedents established in other contexts. Thus a
conflict-of-laws decision refusing to apply a purely local statute or rule of law to a particular multistate transaction may not be valid precedent for refusal to apply the code in an analogous situation. Application of the code in such circumstances may be justified by its comprehensiveness, by the policy of uniformity, and by the fact that it is in large part a reformulation and restatement of the law merchant and of the understanding of a business community which transcends state and even national boundaries. Compare Global Commerce Corp. v. Clark-Babbitt Industries, Inc., 239 F. 2d 716, 719 (2d Cir. 1956). In particular, where a transaction is governed in large part by the code, application of another law to some detail of performance because of an accident of geography may violate the commercial understanding of the parties.
  4. The act does not attempt to prescribe choice-of-law rules for states which do not enact it, but this section does not prevent application of the act in a court of such a state. Common-law choice of law often rests on policies of giving effect to agreements and of uniformity of result regardless of where suit is brought. To the extent that such policies prevail, the relevant considerations are similar in such a court to those outlined above.
  5. Subsection (2) spells out essential limitations on the parties' right to choose the applicable law. Especially in Article 9 parties taking a security interest or asked to extend credit which may be subject to a security interest must have sure ways to find out whether and where to file and where to look for possible existing filings.
  6. Section 9-103 should be consulted as to the rules for perfection of security interests and the effects of perfection and nonperfection. The effect of perfection and nonperfection thereof under subsection (2) and the parties
cannot modify the perfection rules in Section 9-103. The usual rule is that perfection is governed by the law of the jurisdiction in which the collateral is when the last event occurs on which is based the assertion that the security interest is perfected or unperfected. Section 9-103 contains special rules for the cases of intangibles which have no situs, certain types of movable goods, goods which the parties intended at the inception of the transaction to be kept in another jurisdiction, goods subject to certificate of title laws, and certain other cases. Section 9-103 also contains local law rules as to reperfection of security interests when collateral is moved from one jurisdiction to another. See the Official Comments and the South Carolina Reporter's Notes to Section 9-103 for further explanation of these points.
  It is important to note that Section 9-203(4) of the 1972 Text provides that in the event of any conflict between any other South Carolina statutes regulating credit transactions and Article 9, the other South Carolina statute would control. One such statute is the South Carolina Consumer Protection Code, Sections 37-1-101, et seq., of the 1976 Code. Section 37-1-201 of the Consumer Protection Code contains conflict of laws rules that in most situations mandate the application of the Consumer Protection Code to all issues. For transactions covered by the Consumer Protection Code, the rules in Section 37-1-201 rather than Sections 1-105 or 9-103 of the UCC would control in the event of any conflict.
Definitions revised
SECTION 2. Items (9) and (37) of Section 36-1-201 of the 1976 Code are amended to read:
  "(9) 'Buyer in ordinary course of business' means a person who in good faith and without
knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker. All persons who sell minerals or the like (including oil and gas) at wellhead or minehead are considered to be persons in the business of selling goods of that kind. 'Buying' may be for cash or by exchange of other property or on secured or unsecured credit and includes receiving goods or documents of title under a preexisting contract for sale but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt.
  (37) 'Security interest' means an interest in personal property or fixtures which secures payment or performance of an obligation. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer (Section 36-2-401) is limited in effect to a reservation of a 'security interest'. The term also includes any interest of a buyer of accounts or chattel paper which is subject to Chapter 9. The special property interest of a buyer of goods on identification of the goods to a contract for sale under Section 36-2-401 is not a 'security interest', but a buyer may also acquire a 'security interest' by complying with Chapter 9. Unless a lease or consignment is intended as security, reservation of title under a lease or consignment is not a 'security interest', but a consignment is in any event subject to the provisions on consignment sales (Section 36-2-326). Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of
the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security."
OFFICIAL COMMENT
  9. "Buyer in Ordinary Course of Business". From Section 1, Uniform Trust Receipts Act. The definition has been expanded to make clear the type of person protected. Its major significance lies in Section 2-403 and in the Article on Secured Transactions (Article 9).
  The reference to minerals and the like makes clear that a buyer in ordinary course buying minerals under the circumstances described takes free of a prior mortgage created by the sellers. See comment to Section 9-103.
  A pawnbroker cannot be a buyer in ordinary course of business because the person from whom he buys goods (or acquires ownership after foreclosing an initial pledge) is typically an ordinary user and not a person engaged in selling goods of that kind.
  37. "Security Interest".
See Section 1, Uniform Trust Receipts Act. The present definition is elaborated, in view especially of the complete coverage of the subject in Article 9. Notice that in view of the article the term includes the interest of certain outright buyers of certain kinds of property. The last two sentences give guidance on the question whether reservation of title under a particular lease of personal property is or is not a security interest.
SOUTH CAROLINA REPORTER'S NOTES
  The only changes made in this section by the 1972 Text are in subsections (9) and (37). The new language in subsection (9) fits in with changes as to minerals in Section 9-103 which are explained in the references to minerals in the Official Comments and South Carolina Reporter's Notes to that section. The omission of the term "contract rights" in subsection (37) conforms to the elimination of that term from Article 9 in the 1972 Text. See the South Carolina Reporter's Notes to Section 9-106.
Goods to be severed from realty
SECTION 3. Section 36-2-107 of the 1976 Code is amended to read:
  "Section 36-2-107. Goods to be severed from realty; recording.
  (1) A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods within this chapter if they are to be severed by the seller, but until severance, a purported present sale, which is not effective as a transfer of an interest in land, is effective only as a contract to sell.
  (2) A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection (1) or of timber to be cut is a contract for the sale of goods within this chapter whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.
  (3) The provisions of this section are subject to any third-party rights provided by the law relating to realty records, and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then
constitute notice to third parties of the buyer's rights under the contract for sale."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision. See Section 76, Uniform Sales Act on prior policy; Section 7, Uniform Conditional Sales Act.
  Purposes. 1. Subsection (1). Notice that this subsection applies only if the minerals or structures "are to be severed by the seller". If the buyer is to sever, such transactions are considered contracts affecting land and all problems of the Statute of Frauds and of the recording of land rights apply to them. Therefore, the Statute of Frauds section of this article does not apply to such contracts though they must conform to the Statute of Frauds affecting the transfer of interests in land.
  2. Subsection (2). "Things attached" to the realty which can be severed without material harm are goods within this article regardless of who is to effect the severance. The word "fixtures" has been avoided because of the diverse definitions of this term, the test of "severance without material harm" being substituted.
  The provision in subsection (3) for recording such contracts is within the purview of this article since it is a means of preserving the buyer's rights under the contract of sale.
  3. The security phases of things attached to or to become attached to realty are dealt with in the Article on Secured Transactions (Article 9) and it is to be noted that the definition of goods in that article differs from the definition of goods in this article.
  However, both articles treat as goods growing crops and also timber to be cut under a contract of severance.
  Cross references:
  Point 1: Section 2-201.
  Point 2: Section 2-105.
  Point 3: Article 9 and Section 9-105.
  Definitional cross references:
  "Buyer": Section 2-103.
  "Contract": Section 1-201.
  "Contract for sale": Section 2-106.
  "Goods": Section 2-105.
  "Party": Section 1-201.
  "Present sale": Section 2-106.
  "Rights": Section 1-201.
  "Seller": Section 2-103.
SOUTH CAROLINA REPORTER'S NOTES
  Several timber-growing states changed the 1962 Text to make timber to be cut under a contract of severance qualify as goods, regardless of the question who is to sever them. The section is revised to adopt this change. Financing of the transaction is facilitated if the timber is treated as goods instead of real estate. A similar change is made in the definition of "goods" in Section 9-105 of the 1972 Text. To protect persons dealing with timberlands, filing on timber to be cut is required in Part 4 of Article 9 to be made in real estate records in a manner comparable to fixture filing. [See Sections 9-401 (1)(b), 9-402(5) and 9-403(7) of the 1972 Text.]
Transfer and assignment
SECTION 4. Section 36-5-116 of the 1976 Code is amended to read:
  "Section 36-5-116. Transfer and assignment.
  (1) The right to draw under a credit can be transferred or assigned only when the credit is expressly designated as transferable or assignable.
  (2) Even though the credit specifically states that it is nontransferable or nonassignable the
beneficiary may before performance of the conditions of the credit assign his right to proceeds. The assignment is an assignment of an account under Chapter 9 on Secured Transactions and is governed by that chapter except that:
    (a) the assignment is ineffective until the letter of credit or advice of credit is delivered to the designee which delivery constitutes perfection of the security interest under Chapter 9; and
    (b) the issuer may honor drafts or demands for payment drawn under the credit until it receives a notification of the assignment signed by the beneficiary which reasonably identifies the credit involved in the assignment and contains a request to pay the assignee; and
    (c) after what reasonably appears to be a notification has been received the issuer may without dishonor refuse to accept or pay even to a person otherwise entitled to honor until the letter of credit or advice of credit is exhibited to the issuer.
  (3) Except where the beneficiary has effectively assigned his right to draw or his right to proceeds, nothing in this section limits his right to transfer or negotiate drafts or demands drawn under the credit."
OFFICIAL COMMENT
  Prior Uniform Statutory Provisions.
None.
  Purposes. 1. The situation involved is typified by that of an exporter who has made a contract for sale with a foreign buyer and is beneficiary of a letter of credit initiated by the buyer, especially where the subject matter involves goods still to be manufactured. The exporter is frequently in need of the wherewithal not only to finance payment to his supplier but to assure the latter against cancellation of the order during the process of manufacture. For this purpose assignment of the exporter's rights under the letter of credit is frequently desirable.
  Since, however, there is general confusion of thought as to the meaning of "assignment or transfer of a credit", the law remains uncertain. If "assignment of the credit" includes delegation of performance of the conditions under the credit then the initiating customer, who in many cases has put his faith in performance or supervision of performance by a beneficiary of established reputation, may be deprived of real and intended security. See comment to Section 2-210 on the comparable situations as to the sales contract. On the other hand, all "negotiation credits" involve a transfer of the rights of the beneficiary by way of negotiations of the draft and such transfer involves no important loss of the initiating party's intended safety. Meanwhile, the exceedingly useful institution of "back to back" credits, in which an American bank issues a credit with the exporter as the initiating customer and the exporter's supplier as the beneficiary, is dangerous for the banker unless he can secure in advance an effective assignment from the exporter of the latter's rights under the initial credit issued on behalf of his foreign buyer. Against this background, the section is drawn.
  2. Subsection (1) requires the beneficiary's signature on drafts drawn under the credit unless it is expressly designated as assignable or transferable. If it is so designated, the normal rules of assignment apply and both the right to draw and the performance of the beneficiary can be transferred, subject to the beneficiary's continuing liability if any, for the nature of the performance.
  3. Subsection (2) makes clear that to safeguard among other things the letter of credit "back to back" practice, the
assignability of proceeds in advance of performance cannot be prohibited in advance of performance. In this respect the letter of credit is treated like any other contract calling for money to be earned. See Section 9-318 generally and Section 2-210 as to sales contracts. But the special nature of the letter of credit as evidence of the right to proceeds is recognized by the additional requirement of delivery of the letter to the assignee as a condition precedent to the perfection of the assignment. Similarly, the fact that letters of credit normally require presentation of drafts or demands for payment which are drawn under it and that as a result notice of assignment of proceeds can exist simultaneously with a draft payable by order or endorsement to either the beneficiary or another third person leads to the necessity for permitting an issuer to protect itself against exhibition of the letter or advice of credit.
  4. Subsection (3) makes clear that the section has no application to the normal case of negotiation of a draft or the transfer of a demand for payment unless effective assignment under the section has taken place.
  Cross references:
  Point 1: Section 2-210.
  Point 3: Sections 2-210 and 9-318 and Article 9.
  Definitional cross references:
  "Accept". Section 3-410.
  "Account". Section 9-106.
  "Beneficiary". Section 5-103.
  "Credit". Section 5-103.
  "Draft". Section 3-104.
  "Honor". Section 1-201.
  "Issuer". Section 5-103.
  "Receive notification". Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The only change in this section is in subsection (2) which is necessary due to the elimination in the 1972 Text of contract rights as a separate form of collateral and the broadening of the definition of accounts to include what were known as contract rights in the 1962 Text. See the South Carolina Reporter's Notes to Section 9-106 of the 1972 Text.
Second transactions, sales of accounts, and chattel paper
SECTION 5. Chapter 9 of Title 36 of the 1976 Code is amended to read:
"CHAPTER 9
Secured Transactions;
Sales of Accounts,
and Chattel Paper
Part 1
Short Title, Applicability, and Definitions
Sec.
36-9-101. Short title.
36-9-102. Policy and subject matter
          of chapter.
36-9-103. Perfection of security interest in
          multiple-state transactions.
36-9-104. Transactions excluded from chapter.
36-9-105. Definitions and index of definitions.
36-9-106. Definitions: 'account'; 'general
          intangibles'.
36-9-107. Definitions: 'purchase money security
          interest'.
36-9-108. When after-acquired collateral not
          security for antecedent debt.
36-9-109. Classification of goods: 'consumer
          goods'; 'equipment'; 'farm products';
          'inventory'.
36-9-110. Sufficiency of description.
36-9-111. Applicability of bulk transfer laws.
36-9-112. Where collateral is not owned by
          debtor.
36-9-113. Security interests arising under
          chapter on sales.
36-9-114. Consignment.
Part 2
Validity of Security Agreement and
Rights of Parties Thereto
36-9-201. General validity of security agreement.
36-9-202. Title to collateral immaterial.
36-9-203. Attachment and enforceability of
          security interest; proceeds formal
          requisites.
36-9-204. After-acquired property;
          future advances.
36-9-205. Use of disposition of collateral
          without accounting permissible.
36-9-206. Agreement not to assert defenses
          against assignee; modification of
          sales warranties where security
          agreement exists.
36-9-207. Rights and duties when collateral is
          in secured party's possession.
36-9-208. Request for statement of account or
          list of collateral.
Part 3
Rights of Third Parties;
Perfected and Unperfected Security Interests;
Rules of Priority
36-9-301. Persons who take priority over
          unperfected security interests; rights
          of 'lien creditor'.
36-9-302. When filing is required to perfect
          security interests; security interests
          to which filing provisions of this
          chapter do not apply.
36-9-303. When security interest is perfected;
          continuity of perfections.
36-9-304. Perfection of security interest in
          instruments, documents, and goods
          covered by documents; perfection by
          permissive filing; temporary
          perfection without filing or transfer
          of possession.
36-9-305. When possession by secured party
          perfects security interest without
          filing.
36-9-306. 'Proceeds'; secured party's rights on
          disposition of collateral.
36-9-307. Protection of buyers of goods.
36-9-308. Purchase of chattel paper and
          instruments.
36-9-309. Protection of purchasers of
          instruments, documents, and
          securities.
36-9-310. Priority of certain liens arising by
          operation of law.
36-9-311. Alienability of debtor's rights;
          judicial process.
36-9-312. Priorities among conflicting security
          interests in the same collateral.
36-9-313. Priority of security interests in
          fixtures.
36-9-314. Accessions.
36-9-315. Priority when goods are commingled or
          processed.
36-9-316. Priority subject to subordination.
36-9-317. Secured party not obligated on
          contract of debtor.
36-9-318. Defenses against assigns;
          modification of contract after
          notification of assignment; term
          prohibiting assignment ineffective;
          identification and proof of assignment.
Part 4
Filing
36-9-401. Place of filing; erroneous filing;
          removal of collateral.
36-9-402. Formal requisites of financing
          statement; amendments; mortgage as
          financing statement.
36-9-403. What constitutes filing; duration of
          filing; effect of lapsed filing;
          duties of filing officer.
36-9-404. Termination statement.
36-9-405. Assignment of security interest;
          duties of filing officer; fees.
36-9-406. Release of collateral; duties of
          filing officer; fees.
36-9-407. Information from filing officer.
36-9-408. Financing statements covering
          consigned or leased goods.
Part 5
Default
36-9-501. Default; procedure when security
          agreement covers both real and
          personal property.
36-9-502. Collection rights of secured party.
36-9-503. Secured party's right to take
          possession after default.
36-9-504. Secured party's right to dispose of
          collateral after default; effect of
          disposition.
36-9-505. Compulsory disposition of collateral;
          acceptance of the collateral as
          discharge of obligation.
36-9-506. Debtor's right to redeem collateral.
36-9-507. Secured party's liability for failure
          to comply with this part.
Part 6
Public Sale Procedure
36-9-601. Disposition of collateral by public
          sale.
36-9-602. Contents of notice of sale.
36-9-603. Posting and mailing notice of sale.
36-9-604. Exception as to perishable property.
36-9-605. Postponement of public sale.
36-9-606. Procedure upon dissolution of order
          restraining or enjoining sale.
36-9-607. Disposition of proceeds of sale."
"Part 1
Short Title, Applicability, and Definitions
  Section 36-9-101. Short title.
  This chapter is known and may be cited as the Uniform Commercial Code - Secured Transactions."
OFFICIAL COMMENT
  This article sets out a comprehensive scheme for the regulation of security interests in personal property and fixtures. It supersedes prior legislation dealing with such security devices as chattel mortgages, conditional sales, trust receipts, factor's liens, and assignments
of accounts receivable (see note to Section 9-102).
  Consumer installment sales and consumer loans present special problems of a nature which makes special regulation of them inappropriate in a general commercial codification. Many states now regulate such loans and sales under small loan acts, retail installment selling acts, and the like. The National Conference of Commissioners on Uniform State Laws has proposed a Uniform Consumer Credit Code dealing with this subject. While this article applies generally to security interests in consumer goods, it is not designed to supersede such regulatory legislation (see notes to Sections 9-102 and 9-203). Nor is this article designed as a substitute for small loan acts or retail installment selling acts in any state which does not presently have such legislation.
  Pre-code law recognized a wide variety of security devices, which came into use at various times to make possible different types of secured financing. Differences between one device and another persisted, in formal requisites, in the secured party's rights against the debtor and third parties, in the debtor's rights against the secured party, and in filing requirements, although many of those differences no longer served any useful function. Thus an unfiled chattel mortgage was by the law of many states "void" against creditors generally; a conditional sale, often available as a substitute for the chattel mortgage, was in some states valid against all creditors without filing, and in states where filing is required was, if unfiled, void only against lien creditors. The recognition of so many separate security devices had the result that half a dozen filing systems covering chattel security devices might be maintained within a state, some on a county basis, others on a statewide basis, each of which had to be
separately checked to determine a debtor's status.
  Nevertheless, despite the great number of security devices there remained gaps in the structure. In many states, for example, a security interest could not be taken in inventory or a stock in trade although there was a real need for such financing. It was often baffling to try to maintain a technically valid security interest when financing a manufacturing process, where the collateral starts out as raw materials, becomes work in process, and ends as finished goods. Furthermore, it was by no means clear, even to specialists, how under pre-code law a security interest might be taken in many kinds of intangible property - such as television or motion picture rights - which have come to be an important source of commercial collateral.
  While the chattel mortgage was adaptable for use in almost any situation where goods are collateral, there were limitations, sometimes highly technical, on the use of other devices, such as the conditional sale and particularly the trust receipt. The cases are many in which a security transaction described by the parties as a conditional sale or a trust receipt was later determined by a court to be something else, usually a chattel mortgage. The consequence of such a determination was typically to void the security interest against creditors because the security agreement was not filed as a chattel mortgage (even though it may have been filed as a conditional sale or a trust receipt). The already mentioned difficulty of financing on the security of inventory has been gotten around to some extent by the device known as "field warehousing" as well as by the use of the trust receipt. After 1940 a number of states generally authorized inventory financing by enacting statutes, similar although not uniform, known as "factor's lien" acts. Also
after 1940 the increasingly important business of lending against accounts receivable inspired new statutes in that field in more than thirty states.
  The growing complexity of financing transactions forced legislatures to keep piling new statutory provisions on top of our inadequate and already sufficiently complicated nineteenth century structure of security law. The results of this continuing development were increasing costs to both parties and increasing uncertainty as to their rights and the rights of third parties dealing with them.
  The aim of this article is to provide a simple and unified structure within which the immense variety of present day secured financing transactions can go forward with less cost and with greater certainty.
  Under this article the traditional distinctions among security devices, based largely on form, are not retained; the article applies to all transactions intended to create security interests in personal property and fixtures, and the single term "security interest" substitutes for the variety of descriptive terms which had grown up at common law and under a hundred year accretion of statutes. This does not mean that the old forms may not be used, and Section 9-102 (2) makes it clear that they may be.
  This article does not determine whether "title" to collateral is in the secured party or in the debtor and adopts neither a "title theory" nor a "lien theory" of security interests. Rights, obligations, and remedies under the article do not depend on the location of title (Section 9-202). The location of title may become important for other purposes - as, for example, in determining the incidence of taxation - and in such a case the parties are left free to contract as they will. In this connection the use of a form which has
traditionally been regarded as determinative of title (e.g., the conditional sale) could reasonably be regarded as evidencing the parties' intention with respect to title to the collateral.
  Under the article distinctions based on form (except as between pledge and nonpossessory interests) are no longer controlling. For some purposes there are distinctions based on the type of property which constitutes the collateral - industrial and commercial equipment, business inventory, farm products, consumer goods, accounts receivable, documents of title, and other intangibles - and, where appropriate, the article states special rules applicable to financing transactions involving a particular type of property. Despite the statutory simplification a greater degree of flexibility in the financing transaction is allowed than is possible under existing law.
  The scheme of the article is to make distinctions, where distinctions are necessary, along functional rather than formal lines.
  This has made possible a radical simplification in the formal requisite for creation of a security interest.
  A more rational filing system replaces the present system of different files for each security device which is subject to filing requirements. Thus not only is the information contained in the files made more accessible but the cost of procuring credit information, and incidentally, of maintaining the files is greatly reduced.
  The article's flexibility and simplified formalities should make it possible for new forms of secured financing, as they develop, to fit comfortably under its provisions, thus avoiding the necessity, so apparent in recent years, of year by year passing new statutes and tinkering with the old ones to allow legitimate business transactions to go forward.
  The rules set out in this article are principally concerned with the limits of the secured party's protection against purchasers from and creditors of the debtor. Except for procedure on default, freedom of contract prevails between the immediate parties to the security transaction.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text made no changes in this section.
  "Section 36-9-102. Policy and subject matter of chapter.
  (1) Except as otherwise provided in Section 36-9-104 on excluded transactions, this chapter applies:
    (a) to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper, or accounts;
    (b) to any sale of accounts or chattel paper.
  (2) This chapter applies to security interests created by contract including pledge, assignment, chattel mortgage, chattel trust, trust deed, factor's lien, equipment trust, conditional sale, trust receipt, other lien, or title retention contract and lease or consignment intended as security. This chapter does not apply to statutory liens except as provided in Section 36-9-310.
  (3) The application of this chapter to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this chapter does not apply."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision. None.
  Purposes. The main purpose of this section is to bring all consensual security interests in personal property and fixtures under this article, except for certain types of transactions excluded by Section 9-104. In addition certain sales of accounts and chattel paper are brought within this article to avoid difficult problems of distinguishing between transactions intended for security and those not so intended. As to security interests in fixtures created under the law applicable to real estate, see Section 9-313(1).
  1. Except for sales of accounts and chattel paper, the principal test whether a transaction comes under this article is: Is the transaction intended to have effect as security? For example, Section 9-104 excludes certain transactions where the security interest (such as an artisan's lien) arises under statute or common law by reason of status and not by consent of the parties. Transactions in the form of consignments or leases are subject to this article if the understanding of the parties or the effect of the arrangement shows that a security interest was intended. (As to consignments the provisions of Sections 2-326, 9-114, and 9-408 should be consulted). When it is found that a security interest as defined in Section 1-201(37) was intended, this article applies regardless of the form of the transaction or the name by which the parties may have christened it. The list of traditional security devices in subsection (2) is illustrative only; other old devices, as well as any new ones which the ingenuity of lawyers may invent, are included, so long as the requisite intent is found. The controlling definition is that contained in subsection (1).
  The article does not in terms abolish existing security devices. The conditional sale or bailment-lease, for example, is not prohibited; but even though it is used, the rules of this article govern.
  2. If an obligation is to repay money lent and is not part of chattel paper, it is either an instrument or a general intangible. A sale of an instrument or general intangible is not within this article, but a transfer intended to have effect as security for an obligation of the transferor is covered by subsection 1(a). In either case the nature of the transaction is not affected by the fact that collateral is transferred with the instrument or general intangible. Such a transfer is treated as a transfer by operation of law, whether or not it is articulated in the agreement.
  An assignment of accounts or chattel paper as security for an obligation is covered by subsection (1)(b). Commercial financing on the basis of accounts and chattel paper is often so conducted that the distinction between a security transfer and a sale is blurred, and a sale of such property is therefore covered by subsection (1)(b) whether intended for security or not, unless excluded by Section 9-104. The buyer then is treated as a secured party, and his interest as a security interest. See Sections 9-105 (1)(m), 1-201(37). Certain sales which have nothing to do with commercial financing transactions are excluded by Section 9-104(f); compare Spurlin v. Sloan, 368 S.W. 2d 314 (Ky. 1963). See also Section 9-302(1)(e), exempting from filing casual or isolated assignments, and Section 9-302(2), preserving the perfected status of a security interest against the original debtor when a secured party assigns his interest.
  3. In general, problems of choice of law in this article as to the validity of security agreements are governed by Section 1-105.
Problems of choice of law as to perfection of security interests and the effect of perfection or nonperfection thereof, including rules requiring reperfection, are governed by Section 9-103.
  4. An illustration of subsection (3) is as follows:
  The owner of Blackacre borrows $10,000 from his neighbor, and secures his note by a mortgage on Blackacre. This article is not applicable to the creation of the real estate mortgage. Nor is it applicable to a sale of the note by the mortgagee, even though the mortgage continues to secure the note. However, when the mortgagee pledges the note to secure his own obligation to X, this article applies to the security interest thus created, which is a security interest in an instrument even though the instrument is secured by a real estate mortgage. This article leaves to other law the question of the effect on rights under the mortgage of delivery or nondelivery of the mortgage or of recording or nonrecording of an assignment of the mortgagee's interest. See Section 9-104(1). But under Section 3-304(5) recording of the assignment does not of itself prevent X from holding the note in due course.
  5. While most sections of this article apply to a security interest without regard to the nature of the collateral or its use, some sections state special rules with reference to particular types of collateral. An index of sections where such special rules are stated follows:
  Section     Accounts
9-102(1)(b) Sale of accounts
    subject to article
9-103(1) When article applies;
    conflict of laws rules
9-104(f) Certain sales of
    accounts excluded from
    article
9-106 Definitions
9-205 Permissible for debtor
    to make collections
9-206(1) Agreement not to
    assert defenses
    against assignee
9-301(1)(d) Unperfected security
    interest subordinate
    to certain transferees
9-302(1)(e) What assignments need
    not be filed
9-306(5) Rule when goods whose
    sale gave rise to an
    account return to
    seller's possession
9-318(1) Rights of assignee
    subject to defenses
9-318(2) Modification of
    contract after
    assignment of contract
    right
9-318(3) When account debtor
    may pay assignor
9-318(4) Term prohibiting
    assignment ineffective
9-401 Place of filing
9-502 Collection rights of
    secured party
9-504(2) Rights on default
    where underlying
    transaction was sale
    of accounts or
    contract rights
Chattel Paper
9-102(1)(b) Sale subject to article
9-104(f) Certain sales excluded
    from article
9-105(1)(b) Definition
9-205 Permissible for debtor
    to make collections
9-206(1) Agreement not to
    assert defenses
    against assignee
9-207(1) Duty of secured party
    in possession
    to preserve rights
    against prior parties
9-301(1)(c) Unperfected security
    interest subordinate
    to certain transferees
9-304(1) Perfection by filing
9-305 When possession by
    secured party perfects
    security interest
9-306(5) Rule when goods whose
    sale results in
    chattel papers
    return to seller's
    possession
9-308 When purchasers of
    chattel paper have
    priority over security
    interest
9-318(1) Rights of assignee
    subject to defenses
9-318(3) When account debtor
    may pay assignor
9-502 Collection rights of
    secured party
9-504(2) Rights on default
    where underlying
    transaction was sale
Documents and Instruments
9-105(1)(e) Definition of document
    (and see 1-201)
9-105(1)(g) definition of
    instrument
9-206(1) Rule where buyer of
    goods signs both
    negotiable instrument
    and security agreement
9-207(1) Duty of secured party
    in possession
    of instrument to
    preserve rights
    against prior parties
9-301(1)(c) Unperfected security
    interest subordinate
    to certain transferees
9-302(1)(b) and (f) What interests need
    not be filed
9-304(1) How security interest
    can be perfected
9-304(2, 3) Perfection of security
    interest in goods in
    possession of issuer
    of negotiable document
    or of other bailee
9-304(4, 5) Perfection of security
    interest in
    instruments or
    negotiable documents
    without filing or
    transfer of possession
9-305 When possession by
    secured party perfects
    security interest
9-308 When purchasers of
    instruments have
    priority over security
    interest
9-309 When purchasers of
    negotiable
  instruments or
    negotiable documents
    have priority over
    security interest
9-501(1) Rights on default
    where collateral is
    documents
9-502 Collection rights of
    secured party
General Intangibles
9-103(2) When article applies;
    conflict of laws rules
9-105 Obligor is "account
    debtor"
9-106 Definition
9-301(1)(d) Unperfected security
    interest subordinate to certain
    transferees
9-318(1) Rights of assignee
    subject to
    defenses
9-318(3) When account debtor
    may pay assignor
9-502 Collection rights of
    secured party
Goods
(See also Consumer Goods, Equipment, Farm
Products, Inventory)
9-103 When article applies
    with regard to goods
    of a type normally
    used in more than one
    jurisdiction; goods
    covered by certificate
    of title; conflict of
    laws rules
9-105(1)(h) Definition
9-109 Classification of
    goods as consumer
    goods, equipment, farm
    products, and inventory
9-203 Formal requisites of
    security agreement
    covering certain types
    of goods (crops or
    timber)
9-204 Validity of
    after-acquired
    property clause
    covering certain types
    of goods (crops,
    consumer goods)
9-205 Permissible for debtor
    to accept returned
    goods
9-206(2) When security
    agreement can limit or
    modify warranties on
    sale
9-301(1)(c) Unperfected security
    interest subordinate
    to certain transferees
9-304(2, 3) Perfection of security
    interest in goods in
    possession of issuer
    of negotiable document
    or of other bailee
9-304(5) Perfection of security
    interest without
    filing or transfer of
    possession where goods
    in possession of
    certain bailees
9-305 When possession by
    secured party perfects
    security interest
9-306(5) Rule when goods whose
    sale gave rise to
    account or chattel
    paper return to
    seller's possession
9-307 When buyers of goods
    from debtor take free
    of security interest
9-313 Goods which are or
    become fixtures
9-314 Goods affixed to other
    goods
9-315 Goods commingled in a
    product
9-401(1) Place of filing for
    fixtures
9-402 Form of financing
    statement covering
    fixtures
9-504(1) Sale of goods by
    secured party after
    default subject to
    Article 2 (Sales)
Consumer Goods
9-109(1) Definition
9-203(2) Transaction, although
    subject to this
    article, may also be
    subject to certain
    regulatory statutes
9-204(2) Validity of
    after-acquired
    property clause
9-206(1) Buyer's agreement not
    to assert defenses
    against an assignee
    subject to statute or
    decision which
    establishes rule for
    buyers of consumer
    goods
9-302(1)(d) When filing not
    required
9-307(2) When buyers from
    debtor take free of
    security interest
9-401(1)(a) Place of filing
9-505(1) Secured party's duty
    to dispose of
    repossessed consumer
    goods
9-507(1) Secured party's
    liability for improper
    disposition of
    consumer goods after
    default
9-103(2) When article applies
    with regard to certain
    types of equipment
    normally used in more
    than one jurisdiction;
    conflict of laws rules
9-109(2) Definition
9-302(1)(c) When filing not
    required to perfect
    security interest in
    certain farm equipment
9-307(2) When buyers of certain
    farm equipment from
    debtor take free of
    security interest
9-401(1) Place of filing for
    equipment used in
    farming operation
9-503 Secured party's right
    after default to
    remove or to render
    equipment unusable
Farm Products
9-109(3) Definition
9-203(1)(b) Formal requisites of
    security agreement
    covering crops
9-307 When a buyer of farm
    products takes free of
    security interest
9-312(2) Priority of secured
    party who gives new
    value to enable debtor
    to produce crops
9-401(1) Place of filing
9-402(1,3) Form of financing
    statement covering
    crops
Inventory
9-103(3) When article applies
    with regard to certain
    types of inventory
    normally used in more
    than one jurisdiction;
    conflict of laws rules
9-109(4) Definition
9-114 Consigned goods
9-306(5) Rule where goods whose
    sale gave rise to
    account or chattel
    paper return to
    seller's possession
9-307(1) When buyers from
    debtor take free of
    security interest
9-312(3), 9-304(5) When purchase money
    security interest
    takes priority over
    conflicting security
    interest
9-408 Financing statements
    covering consigned or
    leased goods
  Cross references:
  Sections 9-103 and 9-104.
  Point 1: Section 2-326.
  Point 2: Section 1-105.
  Definitional cross references:
  "Account": Section 9-106.
  "Chattel paper": Section 9-105.
  "Contract": Section 1-201.
  "Document": Section 9-105.
  "General intangibles": Section 9-106.
  "Goods": Section 9-105.
  "Instrument": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. The omissions in the first paragraph of subsection (1) make applicable the general choice of law principles of Section 1-105 (except for special rules stated in Section 9-103), instead of an incomplete statement in this section. See the South Carolina Reporter's Notes to Section 1-105 for further explanation of this point.
  2. The change in subsections (1)(a) and (b) reflect the elimination of contract rights as a separate form of collateral in the 1972 Text. See the South Carolina Reporter's Notes to Section 9-106.
  "Section 36-9-103. Perfection of security interest in multiple-state transactions.
  (1) Documents, instruments, and ordinary goods.
    (a) This subsection applies to documents and instruments and to goods other than those covered by a certificate of title described in subsection (2), mobile goods described in subsection (3), and minerals described in subsection (5).
    (b) Except as otherwise provided in this subsection, perfection and the effect of perfection or nonperfection of a security interest in collateral are governed by the law of the jurisdiction where the collateral is when the last event occurs on which is based the assertion that the security interests 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.
    (c) 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 attaches 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 nonperfection 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.
    (d) When collateral is brought into and kept in this State, while subject to a security interest perfected under the law of the jurisdiction from which the collateral was removed, the security interest remains perfected, but if action is required by Part 3 of this chapter to perfect the security interest:
      (i) if the action is not taken before the expiration of the period of perfection in the other jurisdiction or the end of four months
after the collateral is brought into this State, whichever period first expires, the security interest becomes unperfected at the end of that period and is thereafter considered to have been unperfected as against a person who became a purchaser after removal;
      (ii) if the action is taken before the expiration of the period specified in subparagraph (i), the security interest continues perfected thereafter;
      (iii) for the purpose of priority over a buyer of consumer goods (subsection (2) of Section 36-9-307), the period of the effectiveness of a filing in the jurisdiction from which the collateral is removed is governed by the rules with respect to perfection in subparagraphs (i) and (ii).
  (2) Certificate of title.
    (a) This subsection applies to goods covered by a certificate of title issued under a statute of this State or of another jurisdiction under the law of which indication of a security interest on the certificate is required as a condition of perfection.
    (b) Except as otherwise provided in this subsection, perfection and the effect of perfection or nonperfection of the security interest are governed by the law (including the conflict of laws rules) of the jurisdiction issuing the certificate until four months after the goods are removed from that jurisdiction and thereafter until the goods are registered in another jurisdiction, but in any event not beyond surrender of the certificate. After the expiration of that period, the goods are not covered by the certificate of title within the meaning of this section.
    (c) Except with respect to the rights of a buyer described in the next paragraph, a security interest, perfected in another jurisdiction otherwise than by notation on a certificate of title, in goods brought into this
State and thereafter covered by a certificate of title issued by this State is subject to the rules stated in paragraph (d) of subsection (1).
    (d) If goods are brought into this State while a security interest is perfected in any manner under the law of the jurisdiction from which the goods are removed and a certificate of title is issued by this State and the certificate does not show that the goods are subject to the security interest or that they may be subject to security interests not shown on the certificate, the security interest is subordinate to the rights of a buyer of the goods who is not in the business of selling goods of that kind to the extent that he gives value and receives delivery of the goods after issuance of the certificate and without knowledge of the security interest.
  (3) Accounts, general intangibles, and mobile goods.
    (a) This subsection applies to accounts (other than an account described in subsection (5) on minerals) and general intangibles and to goods which are mobile and which are of a type normally used in more than one jurisdiction, such as motor vehicles, trailers, rolling stock, airplanes, shipping containers, road building and construction machinery, and commercial harvesting machinery, and the like, if the goods are equipment or are inventory leased or held for lease by the debtor to others and are not covered by a certificate of title described in subsection (2).
    (b) The law (including the conflict of laws rules) of the jurisdiction in which the debtor is located governs the perfection and the effect of perfection or nonperfection of the security interest.
    (c) If, however, the debtor is located in a jurisdiction which is not a part of the United States, and which does not provide for perfection of the security interest by filing or
recording in that jurisdiction, the law of the jurisdiction in the United States in which the debtor has its major executive office in the United States governs the perfection and the effect of perfection or nonperfection of the security interest through filing. In the alternative, if the debtor is located in a jurisdiction which is not a part of the United States or Canada and the collateral is accounts or general intangibles for money due or to become due, the security interest may be perfected by notification to the account debtor. As used in this paragraph, 'United States' includes its territories and possessions and the Commonwealth of Puerto Rico.
    (d) A debtor is considered located at his place of business if he has one, at his chief executive office if he has more than one place of business, otherwise at his residence. If, however, the debtor is a foreign air carrier under the Federal Aviation Act of 1958, as amended, it is considered located at the designated office of the agent upon whom service of process may be made on behalf of the foreign air carrier.
    (e) A security interest perfected under the law of the jurisdiction of the location of the debtor is perfected until the expiration of four months after a change of the debtor's location to another jurisdiction, or until perfection would have ceased by the law of the first jurisdiction, whichever period first expires. Unless perfected in the new jurisdiction before the end of that period, it becomes unperfected thereafter and is considered to have been unperfected as against a person who became a purchaser after the change.
  (4) Chattel paper.
  The rules stated for goods in subsection (1) apply to a possessory security interest in chattel paper. The rules stated for accounts in subsection (3) apply to a nonpossessory security
interest in chattel paper, but the security interest may not be perfected by notification to the account debtor.
  (5) Minerals.
  Perfection and the effect of perfection or nonperfection of a security interest which is created by the debtor who has an interest in minerals or the like (including oil and gas) before extraction and which attaches to the minerals of the like as extracted, or which attaches to an account resulting from the sale of the minerals or the like at the wellhead or minehead, are governed by the law (including the conflict of laws rules) of the jurisdiction where the wellhead or minehead is located."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision. Paragraph 1(d): Section 14, Uniform Conditional Sales Act.
  Purposes. 1. The general rules on choice of law between the original parties in Section 1-105 apply to this article. However, when conflicting claims to collateral arise, the question depends on perfection of security interests, and thus on the effect of perfection or nonperfection. These problems are dealt with in this section. The general rule [paragraph (1)(b)] is that these questions are governed by the law of the jurisdiction where the collateral is when the last event occurs on which is based the assertion that the security interest is perfected or unperfected. This event will frequently be the filing. If the last event is not filing and perfection is through filing, the filing required is in the jurisdiction where the collateral is when the last event occurs; prior filing in another jurisdiction is not effective and is not saved by the four-month rule discussed below, which applies only when the security interest was perfected in the jurisdiction from which the collateral was
removed. If the security interest was perfected in one jurisdiction and then removed to another jurisdiction, maintenance of perfection in the latter jurisdiction or failure to do so is the "last event" to which the basic rule refers.
  There are, however, exceptions to this basic rule.
  2. If the parties to a transaction creating a purchase money security interest in goods understand when the security interest attaches that the collateral will be kept in another jurisdiction, the law of that jurisdiction governs perfection and the effect of perfection or nonperfection until thirty days after the debtor receives possession of the goods [paragraph (1)(c)]. A filing in that jurisdiction perfects the security interest even before the goods are removed. The thirty-day period is not a period of grace during which filing is unnecessary or has retroactive effect, but merely states the period during which the other jurisdiction is the place of filing. The effect of late filing is governed by other provisions, such as Sections 9-301 and 9-312.
  3. If the goods reach that jurisdiction within the thirty days, the effectiveness of the filing in that jurisdiction continues without interruption. If the collateral is not kept in that jurisdiction before the end of the thirty-day period, paragraph (1)(c) ceases to be applicable and thereafter the law of the jurisdiction where the collateral is controls perfection. A failure of the collateral to reach the intended destination jurisdiction before the expiration of the thirty-day period because of a conflicting claim or otherwise may cause disappointment of expectations that the law of the destination jurisdiction will govern continuously, and caution may dictate filing both in that jurisdiction and in the jurisdiction where the security interest attaches.
  This section uses the concepts that goods are "kept" in a state or "brought" into a state, and related terms. These concepts imply a stopping place of a permanent nature in the state, not merely transit or storage intended to be transitory.
  4.(a) Where the collateral is an automobile or other goods covered by a certificate of title issued by any state and the security interest is perfected by notation on the certificate of title, perfection is controlled by the certificate of title rather than by the law of the state wherein the security interest attached [subsection (2)].
    (b) It has long been hoped that "exclusive certificate of title laws" would provide a sure means of controlling property interest in goods like automobiles, which because of their nature cannot readily be controlled by local or statewide filing alone. In theory the certificate of title should control the property interests in the vehicle wherever the vehicle may be. However, two circumstances operate to prevent the perfect operation of the certificate of title device:
  First, some states have never adopted certificate of title laws. This results in a problem in the issuance of a certificate of title when the vehicle moves from a noncertificate to a certificate state, because the certificate-issuing officer is in no position to conduct a complete search to ascertain the condition of the title in a state of origin which requires no filing or in which filing could be in any one or more of several localities. Also, it seems that when a vehicle moves from a certificate to a noncertificate state, the officers issuing a new registration for the vehicle are not always meticulous to notify secured parties shown on the certificate to give them a chance to perfect their security interests in the noncertificate state when a new
registration is issued. Moreover, some vehicles like mobile homes are not always registered and title certificates are not always issued even in a state which may have certificate laws applicable thereto, because the certificate laws may apply only if the mobile homes use the highways. Registration plates of a mobile home having a certificate could be removed and there would be nothing visible to show that a certificate had ever been issued for it.
  Second, various fraudulent devices based on allegations of loss of the certificate of title enable a dishonest person to obtain both an original and a duplicate of title; to have a security interest shown on only one thereof; and then to effect a transfer into a new state on the basis of the clean certificate, no matter how diligent the officers in the second state may be.
  Given these practical problems, the choice of applicable rules of law after interstate removals of vehicles subject to certificate of title laws is most difficult. This article provides the rules set forth below.
    (c) The security interest perfected by notation on a certificate of title will be recognized without limit as to time; but, of course, perfection by this method ceases if the certificate of title is surrendered [paragraph (2)(b)]. Since the secured party ordinarily holds the certificate, surrender thereof could not occur without his action in the matter in some respect. If the vehicle is reregistered in another jurisdiction while the secured party still holds the certificate, a danger of deception to third parties arises. The section provides that the certificate ceases to control after four months following removal if reregistration has occurred, but during the four months the secured party has the same protection for cases of interstate removal as is set forth in paragraph (1)(d) of the section and Comment
7, subject to additional limitation if the reregistration also involves a new "clean" certificate of title in the removal jurisdiction and a nonprofessional buyer buys while that new certificate is outstanding. See paragraph (2)(d) and Comment 4(e).
    (d) If a vehicle not described in the preceding paragraph (i.e., not covered by a certificate of title) is removed to a certificate state and a certificate is issued therefor, the holder of a security interest has the same four-month protection, subject to the provision discussed in the next paragraph of comment.
    (e) Where "this state" issues a certificate of title on collateral that has come from another state subject to a security interest perfected in any manner, problems will arise if this state, from whatever causes, fails to show on its certificate the security interest perfected in the other jurisdiction. The state will have every reason, nevertheless, to make its certificate of title reliable to the type of person who most needs to rely on it. Paragraph (2)(d) of the section therefore provides that the security interest perfected in the other jurisdiction is subordinate to the rights of a limited class of persons buying the goods while there is a clean certificate of title issued by this State, without knowledge of the security interest perfected in the other jurisdiction. The limited class are buyers who are nonprofessionals, i.e., not dealers and not secured parties, because these are ordinarily professionals. The protective rule mentioned does not apply if this State adopts a device used under some certificate of title laws, namely, stating on the certificate of title that the vehicle may be subject to security interest not shown on the certificate, where the collateral came from a noncertificate state.
  In any event the security interest perfected out of state becomes unperfected unless reperfected in this State under the usual four-month rule (paragraph (2)(d) of the section). States which place a cautionary statement on a certificate of title coming from a noncertificate state make provision to reissue the certificate without the caution after four months.
  One difficulty is that no state's certificate of title law makes any provision by which a foreign security interest may be reperfected in that state, without the cooperation of the owner or other person holding the certificate in temporarily surrendering the certificate. But 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. The only solution for the out-of-state secured party under present certificate of title laws seems to be reperfect by possession, i.e., by repossessing the goods.
  5. The general rules of the section based on location of the collateral could not be applied to certain types of intangible collateral which have no location in any realistic sense, or to certain movable chattels which have no permanent location.
    (a) For accounts and general intangibles there is no indispensable or symbolic document which represents the underlying claim, whose endorsement or delivery is the one effectual means of transfer. There is a considerable body of case law dealing with the situs of choses in action such as these. This case law is in the highest degree confused, contradictory, and uncertain; it affords no base on which to build a statutory rule.
  An account arises typically out of a sale; the contract of sale may be executed in State A, the goods shipped from a warehouse in State B to buyer (account debtor) in State C. The account may then be assigned to an assignee in State D. The seller-assignor may keep his principal records in State E. Under the nonnotification system of accounts financing, the seller-assignor, despite the assignment, bills and collects from the account debtor, under notification financing the account debtor makes payment to the assignee, but the bills may be prepared and sent out by either assignor or assignee. The contacts of the transaction are with many jurisdictions: To which one is it appropriate to look for the governing law? Even more complicated situations may be anticipated when the collateral consists of novel or uncommon types of personal property, which fall within the definition of general intangibles.
  If we bear in mind that our principal question is where certain financing statements shall be filed, two things become clear. First: since the purpose of filing is to allow subsequent creditors of the debtor-assignor to determine the true status of his affairs, the place chosen must be one which such creditors would normally associate with the assignor; thus the place of business of the assignee and the places of business or residences of the various account debtors must be rejected in ordinary situations. Second: the place chosen must be one which can be determined with the least possible risk of error. The place chosen by subsection (3) is the debtor's location, which is ordinarily the location of its chief executive office. This concept is discussed below.
    (b) Another class of collateral for which a special rule is stated in subsection (3) is mobile goods of types which are normally moved for use from one jurisdiction to another. Such
goods are generally classified as equipment; sometimes they may be classified as inventory, for example, goods leased by a professional lessor. Subsection (3) provides that a security interest in such equipment or inventory is subject to this article when the debtor's location, i.e., ordinarily its chief executive office, is in this state.
  While automobiles are obviously mobile goods, they will in most cases be covered by subsection (2) of this section and therefore excluded from subsection (3) by paragraph (a) thereof. If an automobile is not covered by a certificate of title and is classified as equipment or as inventory under lease, it will be subject to subsection (3). Automobiles and other mobile goods which are classified as consumer goods are not subject to subsection (3).
  The rule of subsection (3) applies to goods of a type "normally used" in more than one jurisdiction; there is no requirement that particular goods be in fact used out of state. Thus, if an enterprise whose chief executive office is in State X keeps in State Y goods of the type covered by subsection (3), the rule of subsection (3) requires filing in State X even though the goods never leave State Y.
    (c) "Chief executive office" does not mean the place of incorporation; it means the place from which in fact the debtor manages the main part of his business operations. This is the place where persons dealing with the debtor would normally look for credit information, and is the appropriate place for filing. The term "chief executive office" is not defined in this section or elsewhere in this act. Doubt may arise as to which is the "chief executive office" of a multistate enterprise, but it would be rare that there could be more than two possibilities. A secured party in such a case may easily protect himself at no great additional burden by filing in each possible
place. The subsection states a rule which will be simple to apply in most cases, and which makes it possible to dispense with much burdensome and useless filing.
    (d) If the location of the debtor is moved after a security interest has been perfected in another jurisdiction, the secured party has four months within which to refile, unless the perfection in the original jurisdiction would have expired earlier [paragraph (3)(e)].
    (e) Under subsection (3) each state other than that of the debtor's location in effect disclaims jurisdiction over certain accounts and general intangibles which, by common law rules, might be held to be within its jurisdiction; in the same way there is a disclaimer of jurisdiction over mobile chattels, even though they may be physically located within the state much of the time. If the jurisdiction whose law controls this rule is a United States jurisdiction or has enacted legislation permitting perfection of the security interest by filing or recording in that jurisdiction, the law of that jurisdiction will be recognized in the disclaiming jurisdiction as perfecting the security interest. The jurisdiction of the debtor's location may not, however, have such legislation. For example, mobile equipment is used in New York; the debtor's chief place of business is in a Canadian jurisdiction which will not permit or recognize filing as to property not physically located therein. Paragraph (3)(c) solves this difficulty by permitting perfection through filing in the jurisdiction in the United States in which the debtor has its major executive office in the United States. Where the debtor is not located in the United States or Canada and the collateral is accounts or general intangibles for money due or to become due, the secured party may alternatively perfect by notification to account debtors.
    (f) A sentence in paragraph (3)(d) provides a special rule for security interests in airplanes owned by a foreign air carrier. Without that sentence subsection (3) might refer such a case to the law of a foreign nation whose law is difficult or impossible to ascertain. The sentence clears up such doubts by treating as the location of the carrier the office designated for service of process in the United States under the Federal Aviation Act of 1958. 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 9-302(3), but some nations are not parties to that Convention.
  6. Subsection (4) deals with chattel paper, a semi-intangible security interest which may be perfected either by possession or by filing (Sections 9-304(1), 9-305). As to possessory security, subsection (4) provides that chattel paper shall be subject to the same rule as goods in subsection (1). As to nonpossessory security, subsection (4) provides that it shall be subject to the same rule as the intangibles under subsection (3), except that notification to the account debtor is ruled out as an optional means of perfection under paragraph (3)(c). The reason for this is that a different alternative, possession, is available for chattel paper.
  7. In addition to the foregoing rules defining which jurisdiction governs perfection of a security interest in the first instance, "this state" (i.e., a destination state after removal) adds its own rules requiring reperfection following removal of collateral other than that described in subsections (2), (3), and (5). "This state" will for four months recognize perfection under the law of the jurisdiction from which the collateral came, unless the remaining period of effectiveness of
the perfection in that jurisdiction was less than four months [paragraph (1)(d)]. After the four-month period or the remaining period of effectiveness, whichever is shorter, the secured party must comply with perfection requirements in this State. This rule differs from the former rule of Section 14 of the Uniform Conditional Sales Act. Under that section a conditional seller was required to file within ten days after he "received notice" that the goods had been removed into this State. Apparently, under the Uniform Conditional Sales Act, if the seller never "received notice" his interest continued or became perfected in this State without filing. Paragraph (1)(d) proceeds on the theory that not only the secured party whose collateral has been removed but also creditors of and purchasers from the debtor "in this state" should be considered.
  The 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. Compare the situation arising under Section 9-403(2) when a filing lapses.
  It should be noted that a "purchaser" includes a secured party. Section 1-201(32) and (33). The rights of a purchaser with a security interest against an unperfected security interest are governed by Section 9-312.
  In case of delay beyond the four-month period, there is no "relation back"; and this is also true where the security interest is perfected for the first time in this State.
  If the removal occurs within a short period, like two weeks, before the lapse of the filing in the original state, the secured party has only that period, not the full four months, to
reperfect in "this state". But ordinarily he would have filed a continuation statement in the original jurisdiction; and he may do so to avoid lapse and allow himself the full four months if he is searching for the collateral and needs more time.
  Paragraph (1)(d) does not apply to the case of goods removed from one filing district to another within this State (see subsection (3) of Section 9-401), but only to property brought into this State from another jurisdiction.
  8. Subsection (5) deals with problems relating to the financing of minerals (including oil and gas) as these products come from the ground. In some cases rights in oil and gas in the ground have been split into a large variety of interests. As the oil or gas issues from the ground, it may be encumbered by the group of persons having interest therein. Or the product may be sold at minehead or wellhead and the resulting accounts assigned. The question arises as to the place of filing. The usual rule of this section in subsection (2) would make the place to search for encumbrances on the accounts the location of the respective assignors; but the assignors might be a number of individuals located throughout the country. To avoid the difficult problems of search thus created, subsection (5) provides that the place for filing with respect to security interests in the minerals as they issue from the ground at minehead or wellhead or in the accounts arising out of the sale of the minerals at minehead or wellhead shall be in the state where the minehead or wellhead is located. Section 9-401 similarly provides that the place to file within the state is in the real property records in the county where the minehead or wellhead is located. These rules conform to pre-code practice and to practice which seems to have continued in the early code period before express provision was made for those situations.
  The term "at wellhead" is intended to encompass arrangements based on sale of the product as soon as it issues from the ground and is measured, without technical distinctions as to whether title passes at the "Christmas tree" or the far side of a gathering tank or at some other point. The term "at minehead" is a comparable concept.
  Cross references:
  Sections 1-105, 9-302, and 9-401.
  Definitional Cross References.
  "Accounts": Section 9-106.
  "Attaches": Section 9-203.
  "Chattel paper": Section 9-105.
  "Collateral": Section 9-105.
  "Consumer goods": Section 9-109.
  "Debtor": Section 9-105.
  "Documents": Section 9-105.
  "Equipment": Section 9-109.
  "General intangibles": Section 9-106.
  "Goods": Section 9-105.
  "Instruments": Section 9-109.
  "Purchase money security interest":
Section
  9-107.
  "Purchaser": Section 1-201(33).
  "Security interest": Section 1-201(37).
SOUTH CAROLINA REPORTER'S NOTES
  1. The section has been completely rewritten to clarify the relationship of its several provisions to each other and other sections defining the applicable law. Now that the UCC has been adopted in all states but Louisiana and also adopted in the District of Columbia and the Virgin Islands, the emphasis in the revision has been to make clear where perfection of a security interest must take place, rather than on problems of actual conflicts of rules of law.
  2. The section now concerns itself exclusively with perfection of security interests and the effect of perfection or
nonperfection thereof. The 1962 Text has several references to the "validity" of a security agreement and these have been deleted from the 1972 Text. Likewise, a deletion has been made from Section 9-102 of the language which went beyond that section's basic function of defining the scope of Article 9 and purported to state a choice of law rule. These two changes make it clear that Article 9 does not govern problems of choice of law between the original parties, and that this question is governed by the general choice of law provision in Section 1-105, which authorizes the parties to stipulate what state's laws will control; provided, that the state in question has a reasonable relation to the transaction; and provided, further, that another section of the code does not override such a stipulation. Section 9-103 is an overriding section, but only insofar as perfection and the effects of perfection (i.e., rights of third parties) of a security interest are concerned (See Section 1-105(2) of the 1972 Text). The parties to a security interest would be able to select the applicable law as far as other issues are concerned, e.g., creation, attachment, default enforcement, etc., so long as the transaction bears a reasonable relation to the state selected. In the absence of any such stipulation, Section 1-105 mandates that the laws of South Carolina would determine all such issues. See also the South Carolina Reporter's Notes to Section 1-105 and 9-102. Note, however, that consumer credit transactions covered by the South Carolina Consumer Protection Code are by virtue of Section 9-203(4) governed by the conflict of laws rules of that act, Section 37-1-201 of the 1976 South Carolina Code. In most situations Section 37-1-201 mandates the application of the South Carolina Consumer Protection Code to transactions. To the extent of any conflict in
result, Section 37-1-201 would override both Sections 1-105 and this section of the UCC.
  3. While most of the substantive rules of this section are in the 1962 Text, the statement thereof and their relationship to each other are not clear. In the revision they are clarified according to the following structure:
    (a) The basic rule of this section is that the controlling law, as to perfection of the security interests and the effect of perfection or nonperfection, is the law of the jurisdiction where the collateral is when the last event occurs on which is based the assertion that the security interest is perfected or unperfected [subsection (1)(b)]. Perfection is used in the broad sense of the completion of all action necessary to have a fully perfected security interest in the collateral, i.e., an enforceable, attached security interest that has been "perfected" by whatever action is required by Section 9-302 through 9-306 (filing, possession, etc.), rather than in the more narrow context of the act of perfecting by filing or possession. Thus for example, if a financing statement was filed in State A but the security interest did not attach until the goods were in State B, and there was no financing statement filed in State B, the filing would be ineffective unless the transaction fell into one of the exceptions discussed below, because the last act leading to perfection (assuming a properly signed security agreement) took place in State B.
  There are certain exceptions to this last event test:
      (i) In the case of a purchase money security interest in goods, where the parties intended to remove the collateral to another jurisdiction within thirty days after the debtor received possession of the goods, the law of the latter jurisdiction will govern the initial perfection until the expiration of the
thirty-day period, and thereafter if the goods are removed to the other jurisdiction before the end of the period [subsection (1)(c)]. The equivalent rule in subsection (3) of the 1962 Text is not limited to purchase money security interests. It is important to note that this thirty-day rule only applies if both the seller and the buyer understand at the time the purchase money security interest attaches that the goods will be kept in the second state and the goods actually arrive in the second jurisdiction within thirty days after the debtor receives possession of the goods. If the requisite understanding does not exist or the goods do not arrive in the second state within the required thirty-day period, the normal "last event" rule would apply. In order to guard against these risks dual filing in both the "last event" state and state of destination may be desirable in many situations. See Official Comment 3.
      (ii) Where the collateral is covered by a certificate of title, perfection will be governed by the law of the issuing jurisdiction [subsection (2)]. See paragraph 4 below.
      (iii) If the collateral is certain mobile goods, accounts (other than in minerals), general intangibles and a security interest in chattel paper obtained by filing, perfection will be governed by the law of the jurisdiction where the debtor is located [subsections (3) and (4)]. See paragraph 5 below.
    (b) Where collateral covered by the general rule discussed in (a) above is subject to a perfected security interest and is brought from the state where the security interest was perfected to South Carolina, then the security interest must with one exception be reperfected in South Carolina within four months after the collateral is brought into South Carolina, or before the date the perfection lapses in the state from which it has been removed, if that
date is less than the four-month period [subsection (1)(d)]. If timely reperfection occurs, the security interest is deemed to have been continuously perfected. If such action is not taken, the security interest becomes totally unperfected at the end of the reperfection grace period; and unperfected as to purchasers (a defined term [See Section 1-201(32)] which includes persons acquiring an interest by way of sale, gift, mortgage, or other voluntary transfer) of the collateral in South Carolina who obtained their interest after the removal but before the end of the reperfection grace period. The latter rule with respect to purchasers during the reperfection grace period is designed to overcome one of the holdings in the controversial case of First National Bank v. Stamper, 93 N.J.Super. 150, 225 A 2d 162 (1966) that an intervening purchaser took no rights because the original security interest had absolute priority until after the period for reperfection had expired. The justification for granting rights to such purchasers is the unfairness of depriving them of any interest just because their interest arose before and not after the lapse of the original security interest. The argument that the person acquiring the interest relied on the absence of any notice of a perfected security interest can be made in both situations. The reason why the interest in the pre-lapse situation is limited to "purchasers" is because persons who acquire an interest by involuntary as opposed to voluntary action, for example, liens obtained by judgment creditors do not ordinarily rely on the records before attempting to obtain their lien, and hence they are not really reliance creditors. Making the security interest lapse totally as to all subsequent parties claiming an interest in the collateral at the end of the reperfection grace period is based on a policy decision that four months is a long enough
period of time for the secured party to locate the collateral and to take appropriate action to perfect his security interest in South Carolina. To permit the security interest to have any effectiveness beyond that point would encourage inaction by the secured party and be unfair to South Carolina creditors and purchasers.
  The one exception to the general rule requiring reperfection in South Carolina involves situations where no action is required initially for perfection by the secured party. The most prominent example would be a purchase money security interest in consumer goods (other than nontitled motor vehicles or fixtures). Under Section 9-302(1)(d), such a security interest is automatically perfected when it is fully attached. The security interest in such goods remains effective until it expires even if the goods are moved from one state to another without any further action on the part of the secured party. Since no filing is necessary when any such security interest is created and everyone knows this fact, South Carolina creditors are not as likely to be misled by the absence of any filing as would be the case if the collateral were equipment brought into this State and there were no financing statement filed in South Carolina.
  Note that subsection (d) requires that the security interest be perfected in the jurisdiction from which it was removed. If a security interest in collateral was perfected in State X, the collateral was moved to State Y where no reperfection occurred and then was brought to South Carolina, the security interest would apparently be unperfected in South Carolina, even if the property came into South Carolina within four months of the time it left State X, because the security interest was not perfected in State Y. See Official Comment 1 of the 1972 Text. The most likely situation where this might arise would involve an automobile which is originally purchased in a nontitled state. See subsection 2(c) and paragraph 4 below. Of course, if such a case occurs, the secured party could perfect his security interest in South Carolina, but his priority would be determined by the date of perfection in South Carolina and not from the time of the original perfection in State X.
  4. The provisions in subsection (4) of the 1962 Text dealing with goods in which security interests are perfected on a certificate of title have been substantially modified in subsection (2) of the 1972 Text. Although at first glance, the new rules in subsection (2) seem much more complex than the old rules this complexity is unfortunately necessary. The rules in the 1962 Text are deceptively simple and have been the subject of a great deal of litigation.
  Much of this litigation stems from the inconsistency in state statutes regulating the perfection of security interest in motor vehicles, which are the most common type of goods that are subject to certificate of title statutes. 1 There are three basic types of statutes regulating security interests in motor vehicles: (1) the most common type, which has been adopted by South Carolina and a majority of the states, requires that all security interests be shown on a certificate of title, (2) several states still have certificate of title statutes that require some but not all security interests in motor vehicles be shown on a certificate of title (the most common exemption in these statutes is for nonpurchase money security interests), and (3) some states require that security interests in motor vehicles be perfected under the UCC, in which case the security interest must be perfected by filing a financing statement, even in cases where the motor vehicle is purchased for personal, family,
or household purposes and the security interest is a purchase money security interest. See Section 9-302(1)(d).
  The most logical approach to this situation would have been to repeal the certificate of title statutes and to make all security interests in motor vehicles subject to the Article 9 rules. However, this proved to be politically impossible to accomplish, and the original Article 9 drafting committee ultimately came up with a compromise, incorporated into the UCC as Section 9-302(3)(b) which, in essence, provides that if the state has a certificate of title statute which requires security interests to be shown on a certificate of title perfection of the security interest will be governed by the perfection provisions of the certificate of title statute but that all other aspects of the transaction will be governed by the UCC.
  Although this compromise produces a reasonable accommodation between Article 9 and the various certificate of title statutes, it leaves untouched the issues that arise when motor vehicles subject to a security interest created in one state are moved to another state. Due to the high degree of mobility in our society it is inevitable that the plethora of statutes regulating security interests in motor vehicles would produce a substantial number of legal problems. The key issue that must be resolved is the length of time the original security interest perfected in one state will be effective after the motor vehicle has been removed to another state. The legitimate interest of the secured party, who may be unaware of the removal, in being able to enforce his rights in the collateral wherever it may be located must be balanced against the rights of creditors and other persons in the second state who might acquire an interest in the vehicle. The greater the length of time the original security interest is given priority over
subsequent purchasers and creditors in the second state without any action by the original secured party to reperfect his lien, the greater the potential prejudice to persons dealing with the vehicle in the second state. This situation is further complicated by the fact that most certificate of title statutes are poorly drafted and it is possible in many cases to obtain a clean certificate of title in the second state that does not have on it any indication of the original security interest.
  The traditional common law approach to this problem was to make the security interest effective for an indefinite time. More recently, cases and some statutes have cut down on this absolute priority rule in favor of recognizing to some degree the competing rights of persons in the second state who deal with the vehicle. For example, Section 14 of the Uniform Conditional Sales Act (which was not adopted in South Carolina) provided that the secured party's security interest would lapse if he did not perfect in the second state within ten days after receiving notice of the removal; however, if he never received notice the security interest would be given indefinite effectiveness and priority in the second state. Section 9-103 of the 1962 Text was designed to give even greater protection to the interests of persons dealing with the vehicle in the second state, at least in cases where the original security interest was not shown on a certificate of title. However, most authorities agree that the language in the 1962 Text has been interpreted by many courts in a manner that gives the original secured party more protection than was intended or is justified in current circumstances. As a consequence, the new rules in subsection (2) of the 1972 Text are specifically designed to give far greater recognition to the interests of persons dealing with the collateral in the second state than has been the case under the 1962 Text and prior statutes and cases.
  The new rules regulating security interests when collateral subject to a security interest that must be shown on a certificate of title is moved from one state to another are explained in Official Comment 4 to the 1972 Text. They differ from the equivalent rules in existing subsection (4) in several respects. First, several cases have interpreted the language in subsection (4) of the 1962 Text as giving a secured party whose security interest is noted on a certificate of title when it is removed to another state absolute protection against any rights of creditors or purchasers in the second state even if a new clean certificate is issued in the second state. Subsection (2) of the 1972 Text limits the rights of the initial secured party in this situation significantly. The maximum protection granted the initial secured party is the date the goods are registered in the second jurisdiction or four months after the goods have been removed from the jurisdiction that issued the original certificate of title, whichever is longer (unless the original certificate is surrendered sooner, an unlikely event since the secured party normally retains possession of the certificate of title). After that point in time, the goods are not covered by the original certificate of title and the security interest would then be unperfected unless the secured party has perfected its security interest in the second state. [See subsection 2(b)]. For example, if an automobile subject to a security interest noted on a certificate of title issued in North Carolina was moved by the debtor to South Carolina, the security interest would lapse unless the secured party obtained a South Carolina certificate of title showing his security interest or takes possession of the automobile prior to the expiration of the four-month registration period described above. Note that under this rule, if the secured party retains possession of the certificate of title issued in North Carolina and the vehicle is not registered in South Carolina, then the security interest is valid indefinitely in South Carolina and will be given priority over all persons acquiring an interest in the vehicle while it is located in South Carolina except in the unlikely event a clean certificate of title on the vehicle is issued in South Carolina, a situation which will be explained below. However, since the vehicle is not registered in South Carolina and therefore will not have South Carolina license plates, persons dealing with it will be on notice that it may be subject to a lien created in another state. Therefore, continuing the effectiveness of the original security interest does not create the same kind of prejudice that might result if the car was registered in South Carolina and/or a South Carolina certificate of title that did not indicate the security interest had been issued.
  A second difference from the 1962 Text involves the treatment of goods brought from a state having no certificate of title statute or a nonmandatory certificate of title statute into a state like South Carolina which has a mandatory certificate of title statute. The 1972 Text rules are much more specific than the 1962 Text. Pursuant to subsection 2(c) if the security interest is not shown on a certificate of title (either because it was exempted from the certificate of title statute or the state had no certificate of title statute) the continued effectiveness of the security interest is determined by the rules in subsection (1)(d). In essence, subsection (1)(d) states that unless a perfected security interest is reperfected in the new state before the end of four months after the goods are brought into the second state (or before the security interest lapses in the first state if the security interest will expire before the end of the four months), the security interest will be unperfected thereafter. For example, if an automobile was subject to a security interest perfected in a nontitle state by filing a financing statement under Section 9-302(1)(d) when it was brought into South Carolina, unless the secured party obtains a South Carolina certificate of title showing the security interest or takes possession of the automobile within four months of the time the automobile arrives in South Carolina, the security interest will be unperfected.
  The rules are fairly straightforward and appear to balance the interests of the original secured party and persons in the state where the collateral has been removed in a much more evenhanded manner than the 1962 Text and prior law. In essence, the secured party is given four months to discover that the collateral has been moved to reperfect his security interest in South Carolina if he wants to maintain his priority rights. The longer period allowed if the collateral is not registered in South Carolina does not, as was pointed out above, create any particular prejudice to South Carolinians dealing with the collateral because of the notice factor. In addition since any outstanding certificate of title must be surrendered at the time of registration, the secured party, who presumably has kept possession of the certificate, will receive notice of the attempted registration (unless the debtor is able to avoid this by fraud) and can take appropriate action to reperfect in South Carolina.
  However, one major problem area not dealt with in the above discussion involves the situation where a South Carolina certificate of title covering the collateral is issued and for one reason or another the certificate does not mention the original security interest. In such a case a person acquiring an interest in the goods by purchase, lien, or otherwise while they are located in South Carolina would be relying on the South Carolina certificate of title, and a rule giving the original secured party priority over the rights of such persons creates an unexpected harsh result. The possibility that a South Carolina certificate of title could be issued without the knowledge of the secured party invariably involves deception and fraud on the part of the debtor who fails to notify the title authorities of the outstanding lien. Yet both the original secured party and a subsequent South Carolinian acquiring an interest in the goods are innocent parties to the deception, so the critical determination in which one should bear the risk of loss in this situation. Fortunately, this dilemma occurs infrequently because most debtors are honest and most secured parties are diligent in promptly reperfecting their security interests. However, this situation occurs in enough cases to cause significant legal problems.
  The rules in the 1972 Text do not resolve all the problems that can arise in this situation in a totally satisfactory manner, but the results are at least more specific than under the 1972 Text. Essentially, with one important exception, the revisions give the secured party priority in spite of the South Carolina certificate unless the secured party fails to reperfect the security interest in South Carolina before the end of the grace period described above.2 The one exception is contained in subsection (2)(d) which allows a nonprofessional buyer of the goods in question to take priority over the original secured party regardless of whether the secured party timely reperfects in South Carolina if the new certificate of title does not list the security interest or does not indicate that the goods may be subject to security interests not shown on the certificate. Note that a professional buyer, e.g., a car dealer, would take subject to the prior security interest. The distinction is justified on the grounds that a professional buyer is more aware than a consumer that the goods might be subject to an out-of-state lien and are better able than individuals to bear the risk of loss. In addition, since most debtors bent on perpetrating a fraud are likely to dispose of the property in question shortly after bringing it into this State and nonprofessional buyers or subbuyers the persons most prejudiced by a rule giving priority to the original secured party, are protected, this new rule has effectively shifted the risk of loss in a considerable number of skip-fraud cases to the original secured party. The new rule also puts additional pressure on the secured party to keep track of the collateral and take prompt action to reperfect his security interest.
  The application of the rule protecting nonprofessional buyers to the South Carolina certificate of title statutes produces the following results. Section 56-19-300 of the 1976 South Carolina Code provides for a distinctive title for motor vehicles bearing the legend "This vehicle may be subject to an undisclosed lien" in all cases where the laws of the state in which the motor vehicle was last registered "do not require that lienholders be named on a certificate of title to perfect their security interests". While it is clear that such a legend would automatically be placed on the title on a vehicle coming into South Carolina from a nontitle state, and equally clear that the special legend would not be placed on the certificate of title if the vehicle comes from a state with a mandatory title statute similar to South Carolina's, it is not at all clear from this statutory language whether the special legend would be placed on the certificate of title if the motor vehicle came into South Carolina from a state that required security interests to be perfected by means of a certificate of title in some but not all cases. The determination of this issue is important because the rule protecting the nonprofessional buyer is not applicable if the certificate contains the special legend. The special rule only applies if the certificate of title issued in South Carolina does not list the original security interest and the certificate does not contain the distinctive legend provided for in Section 56-19-300. The special legend is considered adequate notice of a possible valid lien. Hence in South Carolina, the special rule is only applicable to cases where the security interest is undisclosed on the South Carolina certificate of title and the motor vehicle was previously registered in a mandatory title state and possibly when the vehicle was last registered in a nonmandatory state, depending on the interpretation given Section 56-19-300 by the South Carolina Department of Highways and Public Transportation.
  The situation is much less complex as far as watercraft subject to certificates of title issued pursuant to Section 50-23-10 et seq. of the 1976 South Carolina Code are concerned. The Watercraft Title Statute does not contain any provision for special legends to be placed on the titles of boats or outboard motors coming into South Carolina from another state. Hence the special protection granted to nonprofessional buyers in subsection (2)(d) will apply in every case where a South Carolina title covering such goods fails to disclose the original security interest.3 Since few states have certificate of title statutes covering watercraft and outboard motors and in nontitle states purchase money security interests in such goods can be perfected without filing a financing statement if they qualify as consumer goods making it more difficult for a person in South Carolina dealing with the collateral to discover any prior lien created before it came to South Carolina, the protection afforded the nonprofessional buyer by subsection (2)(d) certainly appears to be justifiable.
  One final point on certificates of title that merits discussion is the conflict between Section 9-103 and Section 56-19-640 of the 1976 South Carolina Code, which is part of the South Carolina Motor Vehicle Certificate of Title Statute. With respect to security interests on motor vehicles perfected in another state, Section 56-19-640 contains two basic rules: (1) if a certificate of title issued in the other state indicates the security interest, the security interest is valid indefinitely in this State [Section 56-19-640(2)(a)], and (2) if the lien is not shown on a certificate of title, the lien is nevertheless given absolute priority for four months after a South Carolina certificate of title is issued on the vehicle [Section 56-19-640(2)(b)]. The many situations where the results would be different under the two statutes are obvious and need no explanation. However, Section 9-103 specifically states that it governs the effects of perfection and by implication Section 56-19-640 has been superseded. In addition, Section 9-302(3)(b) of the 1972 Text makes it clear that the only provisions of the certificate of title statutes relating to security interests that are applicable are those that deal with the mechanical aspects of getting the security interest listed on the certificate of title. See the South Carolina Reporter's Notes to Section 9-302(3)(b). Nevertheless, the continued existence of Section 56-19-640 in the 1976 South Carolina Code creates at best a confusing situation and this statute has therefore been repealed in Section 9 of this act.
  5. The two former rules for determining the proper place of perfection as to intangibles [namely, for accounts, the office where the records were kept concerning the accounts; and for general intangibles, the chief place of business of the debtor (see subsections (1) and (2) of the 1962 Text)] have been consolidated into a single rule that the filing is to be at the debtor's location. That location will ordinarily be the office designated in the 1962 Text as "chief place of business", now redesignated as "chief executive office" [see subsection 3(d) and Official Comment 5(c)]. A new provision [paragraph (3)(e)] has been added to cover the case where that office moves from one jurisdiction to another.
  A principal objection to the original rule that the place for filing as to accounts was the place where the debtor kept his records with respect to them was that persons seeking to search records might not know where this place might be, especially in the case of a far-flung debtor or of multicorporate enterprises with central accounting. Where the debtor assigned his accounts without recourse as in factoring, he might keep few records with respect to them. Moreover, it was thought undesirable to have one rule for accounts and another rule for general intangibles, because in many financing situations both types of receivables may be involved. Therefore, it was decided to adopt for both types of intangibles the rule heretofore applicable to general intangibles. In some situations it may be difficult to determine the "chief executive office". If this is the case, then prudence would dictate that financing statements be filed in all possible places.
  The location of the debtor is also the appropriate place for filing as to mobile goods. The 1972 Text specifically states that mobile goods held as inventory for lease as well
as such goods that are actually leased are covered by this subsection. The status of mobile goods held as inventory for lease is unclear under the 1962 Text. It is important to note that mobile goods that are covered by certificates of title are governed by the rules in subsection (2) rather than subsection (3). As a result, if the debtor was "located" in North Carolina but had delivery trucks that were purchased and kept at its place of business in South Carolina, the proper place to perfect a security interest in the trucks would be under the South Carolina Certificate of Title Statute, Sections 56-19-10 et seq. of the 1976 South Carolina Code. However, if the mobile equipment is by virtue of not being "designed or used primarily for the transportation of persons or property and only incidentally operated or moved over a highway" and therefore exempt from the Certificate or Title Statute (see Sections 56-19-10(32) and 56-19-220(7) of the 1976 South Carolina Code), then the proper place to perfect a security interest in the goods would be North Carolina.
  6. The special rules for chattel paper in subsection (4) stem from the ability to perfect a security interest in chattel paper both by possession or filing. Both are quite common. The rationale of this subsection is explained in Official Comment 6.
  7. The provision in subsection (5) stating that perfection of a security interest in minerals (including oil and gas) upon extraction or in accounts arising from the sale of any minerals is determined by the law of the state where the minehead or wellhead is located is new and clarifies the uncertain treatment of such security interests under the 1962 Text. Additional changes in Sections 9-401 through 9-403 of the 1972 Text ensure that any security interest in minerals or accounts arising from the sale of such minerals will be indexed in the
real estate mortgage records under the name of the debtor, and, if the debtor is not the record owner, in the name of the owner of record as well. Thus all such security interests will be in the chain of title of the owner of record.
  8. The new provisions in Section 9-306 of the 1972 Text for perfecting security interests in proceeds in effect require that perfection be in the same place where perfection as to original collateral of the same type would be appropriate. In multistate businesses, the rules in this section would determine the proper place for perfection of such proceeds security interests. For example, if a secured party had a security interest in the inventory of a branch retail store in South Carolina and wanted security interests in the accounts receivable as proceeds of the inventory, a financing statement covering the accounts would have to be filed in the state where the business had its chief executive office, if the chief executive office of the debtor was not in South Carolina. See the South Carolina Reporter's Notes to Section 9-306 for further explanation of the new proceeds rules.
  9. The 1972 Text of this section is a substantial improvement over the 1962 Text. The revised rules provide satisfactory, reasonable results to the most common types of problems that are likely to arise in multistate secured transactions. In particular the new rules with respect to goods that are covered by certificates of title should cut down substantially on the inordinate amount of litigation over the status of security interests on automobiles moved from one state to another. While there are undoubtedly going to be continuing problems with automobiles, these problems result more from the lack of consistency in the various motor vehicle title registration acts than from the rules in Section 9-103.

  1South Carolina and some other states also require certificates of title on watercraft and outboard motors. See Sections 50-23-10 et seq. of the 1976 South Carolina Code.
  2If the secured party fails to reperfect in a timely fashion, the security interest becomes unperfected as of the end of the grace period for reperfection. While it is clear that all persons claiming an interest in the collateral whose interest arises after the grace period expires would take free of the security interest, the status of persons acquiring an interest in the collateral between the date of removal from the state where the security interest was perfected and the end of the grace period has presented special problems. If the goods in question come into South Carolina from a nontitle or incomplete title state, then, as is pointed out in paragraph 3(b) of these notes, under subsection (1)(d)(i) all intervening purchasers take free of the security interests, but persons who do not qualify as purchasers under Section 1-201(32) e.g., judgment lien creditors, would take subject to the security interest. On the other hand, if the goods come into South Carolina from a state which like South Carolina has a mandatory title statute, then apparently only nonprofessional buyers who obtain their interest in the interval between the removal and the lapse date in South Carolina will take free of the security interest but all other persons will take subject to the security interest, pursuant to subsection (2)(d). The difference is hard to rationalize except on the basis of prior case law. Fortunately very few actual situations are likely to arise where the difference will affect the outcome. The only time this could occur is if all four of the following conditions exist: (1) the security interest was perfected in a mandatory title state before removal to South Carolina; (2) the
secured party fails to reperfect in a timely fashion; (3) the party in question acquired the interest in the interval between removal and the date of lapse and (4) the party in question is a professional purchaser of the goods such as an automobile dealer.
  3Persons acquiring an interest in boats or outboard motors in South Carolina would not be restricted to the subsection (2)(d) rule. They might also obtain priority over the original secured party under any of the other rules discussed in this section of the Reporter's Notes.
  "Section 36-9-104. Transactions excluded from chapter.
  This chapter does not apply:
  (a) to a security interest subject to any statute of the United States, to the extent that the statute governs the rights of parties to and third parties affected by transactions in particular types of property; or
  (b) to a landlord's lien; or
  (c) to a lien given by statute or other rule of law for services or materials except as provided in Section 36-9-310 on priority of the liens; or
  (d) to a transfer of a claim for wages, salary, or other compensation of an employee; or
  (e) to a transfer by a government or governmental subdivision or agency; or
  (f) to a sale of accounts or chattel paper as part of a sale of the business out of which they arose, or an assignment of accounts or chattel paper which is for the purpose of collection only, or a transfer of a single account to an assignee in whole or partial satisfaction of a preexisting indebtedness; or
  (g) to a transfer of an interest in or claim in or under any policy of insurance, except as provided with respect to proceeds (Section
36-9-306) and priorities in proceeds (Section 36-9-312); or
  (h) to a right represented by a judgment (other than a judgment taken on a right to payment which was collateral); or
  (i) to any right of setoff; or
  (j) except to the extent that provision is made for fixtures in Section 36-9-313, to the creation or transfer of an interest in or lien on real estate, including a lease or rents; or
  (k) to a transfer in whole or in part of any claim arising out of tort; or
  (l) to a transfer of an interest in any deposit account (subsection (1) of Section 36-9-105), except as provided with respect to proceeds (Section 36-9-306) and priorities in proceeds (Section 36-9-312)."
OFFICIAL COMMENT
  Prior Uniform Statutory Provisions: None.
  Purposes. To exclude certain security transactions from this article.
  1. Where a federal statute regulates the incidents of security interests in particular types of property, those security interests are of course governed by the federal statute and excluded from this article. The Ship Mortgage Act, 1920, is an example of such a federal act. The present provisions of the Federal Aviation Act of 1958 (49 U.S.C. Section 1403, et seq.) call for registration of title to and liens upon aircraft with the Civil Aeronautics Administrator and such registration is recognized as equivalent to filing under this article [Section 9-302(3)]; but to the extent that the Federal Aviation Act does not regulate the rights of parties to and third parties affected by such transactions, security interests in aircraft remain subject to this article.
  Although the Federal Copyright Act contains provisions permitting the mortgage of a copyright and for the recording of an assignment of a copyright (17 U.S.C. Sections 28,30) such a statute would not seem to contain sufficient provisions regulating the rights and third parties to exclude security interests in copyrights from the provisions of this article. Compare Republic Pictures Corp. v. Security-First Federal National Bank of Los Angeles, 197 F. 2d 767 (9th Cir. 1952). Compare with respect to patents, 355 U.S.C. Section 47. The filing under these acts, like the filing provisions of the Federal Aviation Act, are recognized as the equivalent to filing under this article. Section 9-302(3) and (4).
  Even such a statute as the Ship Mortgage Act is far from a comprehensive regulation of all aspects of ship mortgage financing. That act contains provisions on formal requisites, on recordation, and on foreclosure but not much more. If problems arise under a ship mortgage which are not covered by the act, the federal admiralty court must decide whether to improvise and answer under "federal law" or to follow the law of some state with which the mortgage transaction has appropriate contacts. The exclusionary language in paragraph (a) is that this article does not apply to such security interest "to the extent" that the federal statute governs the rights of the parties. Thus if the federal statute contained no relevant provisions, this article could be looked to for an answer.
  2. Except for fixtures (Section 9-313), the article applies only to security interests in personal property. The exclusion of landlord's liens by paragraph (b) and of leases and other interests in or liens on real estate by paragraph (j) merely reiterates the limitations on coverage already made explicit in Section 9-102(3). See Comment 4 to that section.
  3. In all jurisdictions liens are given suppliers of many types of services and materials either by statute or by common law. It was thought to be both inappropriate and unnecessary for this article to attempt a general codification of that lien structure which is in considerable part determined by local conditions and which is far removed from ordinary commercial financing. Moreover, federal law may displace state law in situations such as admiralty liens. Paragraph (c) therefore excludes statutory liens from the article. Section 9-310 states a rule for determining priorities between such liens and the consensual security interests covered by this article.
  4. In many states assignments of wage claims and the like are regulated by statute. Such assignments present important social problems whose solution should be a matter of local regulation. Paragraph (d) therefore excludes them from this article.
  5. Certain governmental borrowings include collateral in the form of assignments of water, electricity, or sewer charges, rents on dormitories, or industrial buildings, tools, etc. Since these assignments are usually governed by special provisions of law, these governmental transfers are excluded from this article.
  6. In general sales as well as security transfers of accounts and chattel paper are within the article (see Section 9-102). Paragraph (f) excludes from the article certain transfers of such intangibles which, by their nature, have nothing to do with commercial financing transactions.
  Similarly, this paragraph excludes from the article such transactions as that involved in Lyon v. Ty-Wood Corporation, 212 Pa. Super. 69, 239 A. 2d 819 (1968) and Spurlin v. Sloan, 368 S.W. 2d 314 (Ky. 1968).
  7. Rights under life insurance and other policies, and deposit accounts, are often put up as collateral. Such transactions are often quite special, do not fit easily under a general commercial statute, and are adequately covered by existing law. Paragraphs (g) and (l) make appropriate exclusions, but provision is made for coverage of deposit accounts and certain insurance money as proceeds.
  8. The remaining exclusions go to other types of claims which do not customarily serve as commercial collateral: judgments under paragraph (h), setoffs under paragraph (i) and tort claims under paragraph (k).
  Cross references:
  Point 1: Section 9-302(3).
  Point 2: Sections 9-102(3) and 9-313.
  Point 3: Sections 9-102(2) and 9-310.
  Point 6: Section 9-102.
  Definitional cross references:
  "Account": Section 9-106.
  "Chattel paper": Section 9-105.
  "Contract": Section 1-201.
  "Deposit account": Section 9-105.
  "Party": Section 1-201.
  "Rights": Section 1-201.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. Several changes have been made in this section which designate transactions that are excluded from Article 9. For the most part they represent relatively minor clarifications or implement changes made elsewhere in the 1972 Text.
  2. Paragraph (e) of the 1962 Text, excluding railway equipment trusts from the coverage of Article 9, has been deleted. The whole thrust of Article 9 is to eliminate differences based on the form of a transaction, and the equipment trust serves the same function as other purchase
money forms of financing. In fact, a form known as the "New York equipment trust" comes closer to a conditional sale contract than it does to a Pennsylvania equipment trust, and thus the former exclusion left substantial uncertainty. Railway financing on rolling stock will continue to be exempt from the filing provisions of Article 9 by virtue of Section 9-302(3) and (4). Thus, the principal purpose of the former exclusion will be retained. There is, however, no reason why the other provisions of Article 9 as to the rights of parties, manner of foreclosure, etc., should not be available to the parties to railway financing, since these problems are not adequately covered by any other statutes. See also the special note at the end of paragraph 1 of the South Carolina Reporter's Notes to Section 9-302.
  3. A new paragraph (e) has been added to make clear that this article does not apply to security interests created by governmental debtors. This was unclear under the 1962 Text. As the Official Comments indicate, such transactions are usually regulated by special state statutes.
  4. The changes in subsection (f) reflect the elimination of contract rights as a separate form of collateral (see the South Carolina Reporter's Notes to Section 9-106) and add the transfer of a single account in satisfaction of an indebtedness to the list of transfers of accounts and chattel paper that are excluded from the UCC on the grounds that they are not financing transactions. See Official Comment 6.
  5. The modification in the wording of subsection (g) dealing with insurance corresponds to a change in Section 9-306(1) of the 1972 Text which makes it clear that insurance paid for loss or damages to collateral qualifies as proceeds and would be covered by Article 9. See the South Carolina Reporter's
Notes to Section 9-306 for further explanation of this point.
  6. The change in subsection (h) makes it clear that rights in a judgment obtained in connection with collateral involved in a secured transaction would not be excluded from Article 9 although judgments in general are excluded because they do not customarily serve as commercial collateral.
  7. The changes in subsection (k) separate the exclusions for tort claims and deposit accounts in financial institutions into two separate exclusions. The new exclusion for deposit accounts defined in Section 9-105(e) in subsection (1) of the 1972 Text is worded so that it does not exclude the secured party's rights under Section 9-306(4) to proceeds that are in deposit accounts in the event insolvency proceedings are begun against the debtor.
  "Section 36-9-105. Definitions and index of definitions.
  (1) In this chapter unless the context otherwise requires:
    (a) 'Account debtor' means the person who is obligated on an account, chattel paper, or general intangible;
    (b) 'Chattel paper' means a writing or writings which evidence both a monetary obligation and a security interest in or a lease of specific goods, but a charter or other contract involving the use or hire of a vessel is not chattel paper. When a transaction is evidenced both by such a security agreement or a lease and by an instrument or a series of instruments, the group of writings taken together constitutes chattel paper;
    (c) 'Collateral' means the property subject to a security interest, and includes accounts and chattel paper which have been sold;
    (d) 'Debtor' means the person who owes payment or other performance of the obligation
secured, whether or not he owns or has rights in the collateral, and includes the seller of accounts, contract rights, or chattel paper. Where the debtor and the owner of the collateral are not the same person, the term 'debtor' means the owner of the collateral in any provision of the chapter dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires;
    (e) 'Deposit account' means a demand, time, savings, passbook, or like account maintained with a bank, savings and loan association, credit union, or like organization, other than an account evidenced by a certificate of deposit;
    (f) 'Document' means document of title as defined in the general definitions of Chapter 1 (Section 36-1-201) and a receipt of the kind described in subsection (2) of Section 36-7-201;
    (g) 'Encumbrance' includes real estate mortgages and other liens on real estate and all other rights in real estate that are not ownership interests;
    (h) 'Goods' includes all things which are movable at the time the security interest attaches or which are fixtures (Section 36-9-313), but does not include money, documents, instruments, accounts, chattel paper, general intangibles, or minerals or the like (including oil and gas) before extraction. 'Goods' also includes standing timber which is to be cut and removed under a conveyance or contract for sale, the unborn young of animals, and growing crops;
    (i) 'Instrument' means a negotiable instrument (defined in Section 36-3-104), or a security (defined in Section 36-8-102) or any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in ordinary course of business transferred by
delivery with any necessary endorsement or assignment;
    (j) 'Mortgage' means a consensual interest created by a real estate mortgage, a trust deed on real estate, or the like;
    (k) An advance is made 'pursuant to commitment' if the secured party has bound himself to make it, whether or not a subsequent event of default or other event not within his control has relieved or may relieve him from his obligation;
    (l) 'Security agreement' means an agreement which creates or provides for a security interest;
    (m) 'Secured party' means a lender, seller, or other person in whose favor there is a security interest, including a person to whom accounts or chattel paper have been sold. When the holders of obligations issued under an indenture of trust, equipment trust agreement, or the like are represented by a trustee or other person, the representative is the secured party;
    (n) 'Transmitting utility' means any person primarily engaged in the railroad, street railway, or trolley bus business, the electric or electronics communications transmission business, the transmission of goods by pipeline, or the transmission or the production and transmission of electricity, steam, gas, or water, or the provisions of sewer service.
  (2) Other definitions applying to this chapter and the sections in which they appear are:
'Account' Section 36-9-106
'Attach' Section 36-9-203
'Construction mortgage' Section
  36-9-313(1)
'Consumer goods' Section
  36-9-109(1)
'Equipment' Section
  36-9-109(2)
'Farm products' Section
  36-9-109(3)
'Fixture' Section 36-9-313
'Fixture filing' Section 36-9-313
'General intangibles' Section 36-9-106
'Inventory' Section
  36-9-109(4)
'Lien creditor' Section
  36-9-301(3)
'Proceeds' Section
  36-9-306(1)
'Purchase money
security interest' Section 36-9-107
'United States' Section 36-9-103
  (3) The following definitions in other chapters apply to this chapter:
'Check'                 Section 36-3-104
'Contract for sale'     Section 36-2-106
'Holder in due course' Section 36-3-302
'Note'                 Section 36-3-104
'Sale'                 Section 36-2-106.
  (4) In addition, Chapter 1 contains general definitions and principles of construction and interpretation applicable throughout this chapter."
OFFICIAL COMMENT
  Prior Uniform Statutory Provisions. Various.
  Purposes. 1. General. It is necessary to have a set of terms to describe the parties to a secured transaction, the agreement itself, and the property involved therein; but the selection of the set of terms applicable to any one of the existing forms (e.g., mortgagor and mortgagee) might carry to some extent the implication that the existing law referable to that form was to be used for the construction and interpretation of this article. Since it is desired to avoid any such implication, a set of terms has been chosen which have no common law or statutory roots tying them to a particular form.
  In place of such terms as "chattel mortgage", "conditional sale", "assignment of accounts receivable", "trust receipt", etc., this article substitutes the general term "security agreement" defined in paragraph (1)(l). In place of "mortgagor", "mortgagee", "conditional vendee", "conditional vendor", etc., this article substitutes "debtor", defined in paragraph (1)(d), and "secured party", defined in paragraph (1)(m). The property subject to the security is "collateral", defined in paragraph (1)(c). The interest in the collateral which is conveyed by the debtor to the secured party is a "security interest", defined in Section 1-201(37).
  2. Parties. The parties to the security agreement are the "debtor" and the "secured party".
  "Debtor". In all but a few cases the person who owes the debt and the person whose property secures the debt will be the same. Occasionally, one person furnishes security for another's debt, and sometimes property is transferred subject to a secured debt of the transferor which the transferee does not assume; in such cases, under the second sentence of the definition, the term "debtor" may, depending upon the context, include either or both such persons. Section 9-112 sets out special rules which are applicable where collateral is owned by a person which does not owe a debt.
  "Secured party". The term includes any person in whose favor there is a security interest (defined in Section 1-201). The term is used equally to refer to a person who as a seller retains a lien on or title to goods sold, to a person whose interest arises initially from a loan transaction, and to an assignee of either. Note that a seller is a "secured party" in relation to his customer; the seller becomes a "debtor" if he asssigns the chattel paper as collateral. This is also true of a lender who
assigns the debt as collateral. With the exceptions stated in Section 9-104(f) the article applies to any sale of accounts or chattel paper; the term "secured party" includes an assignee of such intangibles whether by sale or for security, to distinguish him from the payee of the account, for example, who becomes a "debtor" by pledging the account as security for a loan.
  On the applicability of the terms "debtor" and "secured party" to consignments and leases see Section 9-408 and comment thereto.
  "Account debtor". Where the collateral is an account, chattel paper, or general intangible the original debtor is called the "account debtor", defined in paragraph (1)(a).
  3. Property subject to the security agreement. "Collateral", defined in paragraph (1)(c), is a general term for the tangible and intangible property subject to a security interest. For some purposes the code makes distinctions between different types of collateral and therefore further classification of collateral is necessary. Collateral which consists of tangible property is "goods", defined in paragraph (1)(h); and "goods" are again subdivided in Section 9-109. For purposes of this article all intangible collateral fits one of five categories, two of which, "accounts" and "general intangibles", are defined in the following Section 9-106; the other three, "documents", "instruments", and "chattel paper", are defined in paragraphs (1)(f), (1)(i), and (1)(b) of this section.
  "Goods". The definition in paragraph (1)(h) is similar to that contained in Section 2-105 except that the Sales Article definition refers to "time of identification to the contract for sale", while this definition refers to "the time the security interest attaches".
  For the treatment of fixtures, Section 9-313 should be consulted. It will be noted that the
treatment of fixtures under Section 9-313 does not at all points conform to their treatment under Section 2-107 (goods to be severed from realty). Section 2-107 relates to sale of such goods; Section 9-313 to security interests in them. The discrepancies between the two sections arise from the differences in the types of interest covered. A comparable discrepancy exists as to minerals. In the case of timber, both sections treat it as goods if it is to be severed under a contract of sale, but not otherwise.
  If in any state minerals before severance are deemed to be personal property, they fall outside the article's definition of "goods" and would therefore fall in the catch-all definition, "general intangibles", in Section 9-106. The special provisions of Section 9-103(5) would not apply and those of Section 9-103(3) would apply. The resulting problems should be considered locally.
  For the purpose of this article, goods are classified as "consumer goods", "equipment", "farm products", and "inventory"; those terms are defined in Section 9-109. When the general term "goods" is used in this article, it includes, as may be appropriate in the context, the subclasses of goods defined in Section 9-109.
  "Instrument". The term as defined in paragraph (1)(i) includes not only negotiable instruments and investments securities but also any other intangibles evidenced by writings which are in ordinary course of business transferred by delivery. As in the case of chattel paper "delivery" is only the minimum stated and may be accompanied by other steps.
  If a writing is itself a security agreement or lease with respect to specific goods it is not an instrument although it otherwise meets the term of the definition. See comment below on "chattel paper".
  The fact that an instrument is secured by collateral, whether the collateral be other instruments, documents, goods, accounts, or general intangibles, does not change the character of the principal obligation as an instrument or convert the combination of instrument and collateral into a separate code classification of personal property. The single qualification to this principle is that an instrument which is secured by chattel paper is itself part of the chattel paper, while also retaining its identity as an instrument.
  "Document". See the comments under Sections 1-201(15) and 7-201.
  "Chattel paper". To secure his own financing a secured party may wish to borrow against or sell the security agreement itself along with his interest in the collateral which he has received from his debtor. Since the refinancing of paper secured by specific goods presents more problems of its own, the term "chattel paper" is used to describe this kind of collateral. The comments under Section 9-308 further describe this concept.
  Charters of vessels are excluded from the definition of chattel paper because they fit under the definition of accounts. See comment to Section 9-106. The term "charter" as used herein and in Section 9-106 includes bareboat charters, time charters, successive voyage charters, contracts of affreightment, contracts of carriage, and all other arrangements for use of vessels.
  4. The following transactions illustrate the use of the term "chattel paper" and some of the other terms defined in this section.
  A dealer sells a tractor to a farmer on conditional sales contract or purchase money security interest. The conditional sales contract is a "security agreement", the farmer is the "debtor", the dealer is the "secured party", and the tractor is the type of
"collateral" defined in Section 9-109 as "equipment". But now the dealer transfers the contract to his bank, either by outright sale or to secure a loan. Since the conditional sales contract is a security agreement relating to specific equipment, the conditional sales contract is now the type of collateral called "chattel paper". In this transaction between the dealer and his bank, the bank is the "secured party", the dealer is the "debtor", and the farmer is the "account debtor".
  Under the definition of "security interest" in Section 1-201(37) a lease does not create a security interest unless intended as security. Whether or not the lease itself is a security agreement, it is chattel paper when transferred if it relates to specific goods. Thus, if the dealer enters into a straight lease of the tractor to the farmer (not intended as security), and then arranges to borrow money on the security of the lease, the lease is chattel paper.
  Security agreements of the type formerly known as chattel mortgages and conditional sales contracts are frequently executed in connection with a negotiable note or a series of such notes. Under the definitions in paragraphs (1)(b) and (1)(i) the rules applicable to chattel paper, rather than those relating to instruments, are applicable to the group of writings (contract plus note) taken together.
  5. Miscellaneous definitions. "Deposit account" is a type of collateral excluded from this article under Section 9-104(1), except when it constitutes proceeds of other collateral under Section 9-306.
  The terms "encumbrance" and "mortgage" are defined for use in the section on fixtures, Section 9-113.
  The term "transmitting utility" is defined to designate a special class of debtors for whom separate filing rules are provided in Part 4,
thus obviating all local filing and particularly the several local filings that would be necessary under the usual rules of Section 9-401 for the fixture collateral of a far-flung public utility debtor. See comments under Sections 9-401 and 9-403.
  The term "pursuant to commitment" is defined for use in the rules relating to priority of future advances in Sections 9-301(4), 9-307(3), and 9-312(7).
  6. Comments to the definitions indexed in subsections (2) and (3) follow the sections in which the definitions are contained.
  Cross references:
  Point 2: Sections 9-104(f) and 9-112.
  Point 3: Sections 2-105, 2-107, 9-106, 9-303,
  and 9-313.
  Definitional cross references:
  "Account": Section 9-106.
  "Agreement": Section 1-201.
  "Document of title": Sections 1-201, 7-201.
  "General intangibles": Section 9-106.
  "Holder": Section 1-201.
  "Money": Section 1-201.
  "Negotiable instrument": Section 3-104.
  "Person": Section 1-201.
  "Representative": Section 1-201.
  "Rights": Section 1-201.
  "Security": Section 8-102.
  "Security interest": Section 1-201.
  "Writing": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. This section contains several new definitions and changes in the 1962 Text definitions that correspond to other changes made in the 1972 Text.
  2. The deletion of the term "contract right" in subsections (1)(a), (c), (d), and (m) [(i) in the 1962 Text] reflects the elimination of
contract rights as a separate form of collateral in the 1972 Text. See the South Carolina Reporter's Notes to Section 9-106.
  3. The language dealing with charters of vessels in subsection (b) was first recommended for adoption in the 1966 Revisions to Article 9. The purpose of this amendment, and a corresponding amendment in Section 9-105, is to make it clear that such charters create accounts and not chattel paper. Serious practical problems could develop if such charters were held to be chattel paper because in many charter transactions there are multiple copies of the charter agreement and under Section 9-308 an assignee of the charterer who takes possession of a charter document would have priority over a secured party who had filed a financing statement claiming a security interest in the money due from the charter. South Carolina, however, did not enact the language relating to charters in either Section 9-105 or 9-106 when the Uniform Commercial Code was adopted in 1966.
  4. The definition of deposit account in subsection (e) is new and is explained in the South Carolina Reporter's Notes to Sections 9-104 and 9-306. A certificate of deposit is excluded from the definition presumably on the grounds that it is not the type of "account" where proceeds would normally be deposited.
  5. The change in the definition of a document in subsection (f) [which was subsection (e) in the 1962 Text] is a minor technical change.
  6. The definition of encumbrance in subsection (g) is new and is relevant in determining priorities in fixtures under Section 9-313.
  7. The changes in the definition of goods in subsection (h) [which was subsection (f) in the 1962 Text] reflect the elimination of contract rights as a separate form of collateral and the revised treatment of preextraction rights of minerals and standing lumber to be cut under a
conveyance or contract of sale in the 1972 Text. See Official Comment 3 to this section and the South Carolina Reporter's Notes to Sections 2-107 and 9-401 through 9-403 for further details on this change.
  8. The definition of a mortgage in subsection (i) is new and is applicable in Section 9-313 which deals with priority rights of security interests in fixtures.
  9. The definition of an advance "pursuant to commitment" is new. The term is used in several sections, including 9-204(3) and 9-312(7) of the 1972 Text dealing with future advances under an open end type security agreement; 9-301(4), dealing with advances made after a third party judgment creditor has obtained a judgment lien on the collateral; and 9-307(3), dealing with advances made after collateral has been sold to a buyer in a transaction that is not in the ordinary course of business.
  10. The definition of transmitting utility is new. The 1972 Text authorizes special one-time centralized filing of financing statements covering collateral owned by such utilities. See the Official Comments and South Carolina Reporter's Notes to Sections 9-401 and 9-403 of the 1972 Text. Note that the definition includes railroads as well as power companies.
  "Section 36-9-106. Definitions: 'account' and 'general intangibles'.
  'Account' means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. 'General intangibles' means any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money. All rights to payment earned or unearned under a charter or other contract involving the use or hire of a
vessel and all rights incident to the charter or contract are accounts."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision. None.
  Purposes. The terms defined in this section round out the classification of intangibles; see the definitions of "document", "chattel paper", and "instrument" in Section 9-105. Those three terms cover the various categories of commercial paper which are either negotiable or to a greater or less extent dealt with as if negotiable. The term "account" covers most choses in action which may be the subject of commercial financing transactions but which are not evidenced by an indispensable writing. The term "general intangibles" brings under this article miscellaneous types of contractual rights and other personal property which are used or may become customarily used as commercial security. Examples are goodwill, literary rights, and rights of performance. Other examples are copyrights, trademarks, and patents, except to the extent that they may be excluded by Section 9-104(a). This article solves the problems of filing of security interests in these types of intangibles (Sections 9-103(3) and 9-401). Note that this catch-all definition does not apply to money or to types of intangibles which are specifically excluded from the coverage of the article (Section 9-104) and note also that under Section 9-302 filing under a federal statute may satisfy the filing requirements of this article.
  A right to the payment of money is frequently buttressed by ancillary covenants to insure the preservation of collateral, such as covenants in a purchase agreement, note, or mortgage requiring insurance on the collateral or forbidding removal of the collateral; or covenants to preserve creditworthiness of the
promisor, such as covenants restricting dividends, etc. While these miscellaneous ancillary rights might conceivably be thought to fall within the definition of "general intangibles", it is not the intention of the code to treat them separately and require the perfection of assignment thereof by filing in the manner required for perfection of an assignment of general intangibles. Whatever perfection is required for the perfection of an assignment of the right to the payment of money will also carry these ancillary rights.
  Similarly, when the right to the payment of money is not yet earned by performance, there are frequently ancillary rights designed to assure that an assignee may complete the performance and crystallize the right to payment of money. Such rights are frequently present in a "maintenance" lease where the lessor has continuing duties to perform or in a ship charter. These ancillary rights, if considered in the abstract, might be thought to be "general intangibles", since they do not themselves involve the payment of money; but it is not the intent of the code to split up the rights to the payment of money and its ancillary supports, and thereby multiply the problem of perfection of assignments. Therefore, all rights of the lessor in a lease are to be perfected as "chattel paper", and all rights of the owner in a ship charter are to be perfected as "accounts".
  "Account" is defined as a right to payment for goods sold or leased or services rendered; the ordinary commercial account receivable. In some special cases a right to receive money not yet earned by performance crystallizes not into an account but into a general intangible, for it is a right to payment of money that is not "for goods sold or leased or for services rendered". Examples of such rights are the right to receive payment of a loan not evidenced by an instrument or chattel paper; a right to receive partial
refund of purchase prices paid by reason of retroactive volume discounts; rights to receive payment under licenses of patents and copyrights, exhibition contracts, etc.
  This article rejects any lingering common law notion that only rights already earned can be assigned. In the triangular arrangement following assignment, there is reason to allow the original parties - assignor and account debtor - more flexibility in modifying the underlying contract before performance than after performance (see Section 9-318). It will, however, be found that in most situations the same rules apply to accounts both before and after performance.
  Cross References:
  Sections 9-103(2), 9-104, 9-302(3), 9-318, and 9-401.
  Definitional cross references:
  "Chattel paper": Section 9-105.
  "Contract": Section 1-201.
  "Document": Section 9-105.
  "Goods": Section 9-105.
  "Instrument": Section 9-105.
  "Section 36-9-107. Defintions: 'purchase money security interest'.
  A security interest is a 'purchase money security interest' to the extent that it is:
    (a) taken or retained by the seller of the collateral to secure all or part of its price; or
    (b) taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used."
OFFICIAL COMMENT
Purposes: 1. Under existing rules of law and under this Article purchase money obligations often have priority over other obligations. Thus a purchase money obligation has priority
over an interest acquired under an after-acquired property clause (Section 9-312(3) and (4)); where filing is required a grace period of ten days is allowed against creditors and transferees in bulk (Section 9-301(2)); and in some instances filing may not be necessary (Section 9-302(1)(c) and (d)).
  Under this section a seller has a purchase money security interest if he retains a security interest in the goods; a financing agency has a purchase money security interest when it advances money to the seller, taking back an assignment of chattel paper, and also when it makes advances to the buyer (e.g., on chattel mortgage) to enable him to buy, and he uses the money for that purpose.
  2. When a purchase money interest is claimed by a secured party who is not a seller, he must of course have given present consideration. This section therefore provides that the purchase money party must be one who gives value "by making advances or incurring an obligation"; the quoted language excludes from the purchase money category any security interest taken as security for or in satisfaction of a preexisting claim or antecedent debt.
  Cross references:
  Point 1. Sections 9-301, 9-302 and 9-312.
  Point 2. Section 9-108,
  Definitional cross references:
  "Collateral". Section 9-105.
  "Debtor". Section 9-105.
  "Person". Section 1-201.
  "Rights". Section 1-201.
  "Security interest". Section 1-201.
  "Value". Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The term "purchase money security interest" is the rough equivalent of the conditional sales device under existing law. The main feature is
that the debt secured is the deferred purchase price or the advance of the purchase price by a third party financer for the sale of the collateral. Such purchase money obligations are accorded special treatment in several sections of Article 9. (See Commercial Code Sections 9-312(3) and (4); 9-301(2); and 9-302(1)(c) and (d)).
  Cross references --
  As to filing requisite for perfection of security interest, see Section 36-9-302.
  As to priorities of conflicting security interests, see Section 36-9-312.
  As to persons who take priority over unperfected security interest, see Section 36-9-301.
  As to effect of after-acquired security with respect to antecedent debt, see Section 36-9-108.
  "Section 36-9-108. When after-acquired collateral not security for antecedent debt.
  Where a secured party makes an advance, incurs an obligation, releases a perfected security interest, or otherwise gives new value which is to be secured in whole or in part by after-acquired property, his security interest in the after-acquired collateral is considered to be taken for new value and not as security for an antecedent debt if the debtor acquires his rights in the collateral either in the ordinary course of his business or under a contract of purchase made pursuant to the security agreement within a reasonable time after new value is given."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. Many financing transactions contemplate that the collateral will include both the debtor's existing assets and also assets thereafter acquired by him in the operation of his business. This article generally validates such after-acquired property interests (see Section 9-204 and comment) although they may be subordinated to later purchase money interests under Section 9-312(3) and (4).
  Interests in after-acquired property have never been considered as involving transfers of property for antecedent debt merely because of the after-acquired feature, nor should they be so considered. The section makes explicit what has been true under the case law: an after-acquired property interest is not, by virtue of that fact alone, security for a preexisting claim. This rule is of importance principally in insolvency proceedings under the Federal Bankruptcy Act or state statutes which make certain transfers for antecedent debt voidable as preferences. The determination of when a transfer is for antecedent debt is largely left by the Bankruptcy Act to state law.
  Two tests must be met under this section for an interest in after-acquired property to be one not taken for an antecedent debt. First: the secured party must, at the inception of the transaction, have given new value in some form. Second: the after-acquired property must come in either in the ordinary course of the debtor's business or as an acquisition which is made under a contract of purchase entered into within a reasonable time after the giving of new value and pursuant to the security agreement. The reason for the first test needs no comment. The second is in line with limitations which judicial construction has placed on the
operation of after-acquired property clauses. Their coverage has been in many cases restricted to subsequent ordinary course acquisitions; this article does not go so far (see Section 9-204 and comment), but it does deny present value status to out of ordinary course acquisitions not made pursuant to the original loan agreement. This solution gives the secured party full protection as to the collateral which he may be reasonably thought to have contracted for; it gives other creditors the possibility, under the law of preferences, of subjecting to their claims windfall or uncontemplated acquisitions shortly before bankruptcy.
  2. The term "value" is defined in Section 1-201(44) and discussed in the accompanying comment. In this section and in other sections of this article the term "new value" is used but is left without statutory definition. The several illustrations of "new value" given in the text of this section (making an advance, incurring an obligation, releasing a perfected security interest) as well as the "purchase money security interest" definition in Section 9-107 indicate the nature of the concept. In other situations it is left to the courts to distinguish between "new" and "old" value, between present considerations and antecedent debt.
  Cross references:
  Point 1: Sections 9-204 and 9-312.
  Point 2: Section 9-107.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Contract": Section 1-201.
  "Debtor": Section 9-105.
  "Purchase": Section 1-201.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text made no changes in this section.
  "Section 36-9-109. Classification of goods; 'consumer goods'; 'equipment'; 'farm products'; 'inventory'.
  Goods are:
  (1) 'consumer goods' if they are used or bought for use primarily for personal, family, or household purposes;
  (2) 'equipment' if they are used or bought for use primarily in business (including farming or a profession) or by a debtor who is a nonprofit organization or a governmental subdivision or agency or if the goods are not included in the definitions of inventory, farm products, or consumer goods;
  (3) 'farm products' if they are crops or livestock or supplies used or produced in farming operations or if they are products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk, and eggs), and if they are in the possession of a debtor engaged in raising, fattening, grazing, or other farming operations. If goods are farm products they are neither equipment nor inventory;
  (4) 'inventory' if they are held by a person who holds them for sale or lease or to be furnished under contracts of service or he has so furnished them, or if they are raw materials, work in process, or materials used or consumed in a business. Inventory of a person is not to be classified as his equipment."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. This section classifies goods as consumer goods, equipment, farm products, and inventory. The classification is important in
many situations: it is relevant, for example, in determining the rights of persons who buy from a debtor goods subject to a security interest (Section 9-307), in certain questions of priority (Section 9-312), in determining the place of filing (Section 9-401), and in working out rights after default (Part 5). Comment 5 to Section 9-102 contains an index of the special rules applicable to different classes of collateral.
  2. The classes of goods are mutually exclusive; the same property cannot at the same time and as to the same person be both equipment and inventory, for example. In borderline cases - a physician's car or a farmer's jeep which might be either consumer goods or equipment - the principal use to which the property is put should be considered as determinative. Goods can fall into different classes at different times; a radio is inventory in the hands of a dealer and consumer goods in the hands of a householder.
  3. The principal test to determine whether goods are inventory is that they are held for immediate or ultimate sale. Implicit in the definition is the criterion that the prospective sale is in the ordinary course of business. Machinery used in manufacturing, for example, is equipment and not inventory even though it is the continuing policy of the enterprise to sell machinery when it becomes obsolete. Goods to be furnished under a contract of service are inventory even though the arrangement under which they are furnished is not technically a sale. When an enterprise is engaged in the business of leasing a stock of products to users (for example, the fleet of cars owned by a car rental agency), that stock is also included within the definition of "inventory". It should be noted that one class of goods which is not held for disposition to a purchaser or user is included in inventory: "Materials used or
consumed in a business". Examples of this class of inventory are fuel to be used in operations, scrap metal produced in the course of manufacture, and containers to be used to package the goods. In general it may be said that goods used in a business are equipment when they are fixed assets or have, as identifiable units, a relatively long period of use; but are inventory, even though not held for sale, if they are used up or consumed in a short period of time in the production of some end product.
  4. Goods are "farm products" only if they are in the possession of a debtor engaged in farming operations. Animals in a herd of livestock are covered whether they are acquired by purchase or result from natural increase. Products of crops or livestock remain farm products so long as they are in the possession of a debtor engaged in farming operations and have not been subjected to a manufacturing process. The terms "crops", "livestock", and "farming operations" are not defined; however, it is obvious from the text that "farming operations" includes raising livestock as well as crops; similarly, since eggs are products of livestock, livestock includes fowl.
  When crops or livestock or their products come into the possession of a person not engaged in farming operations they cease to be "farm products". If 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 determined by this article. At one end of the scale some processes are so closely connected with farming - such as pasteurizing milk or boiling sap to
produce maple syrup or maple sugar - that they would not rank as manufacturing. On the other hand an extensive canning operation would be manufacturing. The line is one for the courts to draw. After farm products have been subjected to a manufacturing operation, they become inventory if held for sale.
  Note that the buyer in ordinary course who under Section 9-307 takes free of a security interest in goods held for sale does not include one who buys farm products from a person engaged in farming operations.
  5. The principal definition of equipment is a negative one: goods used in a business (including farming or a profession) which are not inventory and not farm products. Trucks, rolling stock, tools, machinery are typical. It will be noted furthermore that any goods which are not covered by one of the other definitions in this section are to be treated as equipment.
  Cross references:
  Point 1: Sections 9-102, 9-307, 9-312, 9-401, and Part 5.
  Point 3: Section 9-307.
  Point 4: Section 9-307.
  Definitional cross references:
  "Contract": Section 1-201.
  "Debtor": Section 9-105.
  "Goods": Section 9-105.
  "Organization": Section 1-201.
  "Person": Section 1-201.
  "Sale": Sections 2-106 and 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text made no changes in this section.
  "Section 36-9-110. Sufficiency of description.
  For the purposes of this chapter any description of personal property or real estate
is sufficient whether or not it is specific if it reasonably identifies what is described."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. The requirement of description of collateral (see Section 9-203 and comment thereto) is evidentiary. The test of sufficiency of a description laid down by this section is that the description do the job assigned to it - that it make possible the identification of the thing described. Under this rule courts should refuse to follow the holdings, often found in the older chattel mortgage cases, that descriptions are insufficient unless they are of the most exact and detailed nature, the so-called "serial number" test. The same test of reasonable identification applies where a description of real estate is required in a financing statement. See Section 9-402.
  Cross references:
  Section 9-203 and 9-402.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text made no changes in this section.
  "Section 36-9-111. Applicability of bulk transfer laws.
  The creation of a security interest is not a bulk transfer under Chapter 6 (see Section 36-6-103)."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. The bulk transfer laws, which have been almost everywhere enacted, were designed to prevent a once prevalent type of fraud which seems to have flourished particularly in the retail field: the owner of a debt-burdened
enterprise would sell it to an unwary purchaser and then remove himself, with the purchase price and his other assets, beyond the reach of process. The creditors would find themselves with no recourse unless they could establish that the purchaser assumed existing debts. The bulk transfer laws, which require advance notice of sale to all known creditors, seem to have been successful in preventing such frauds.
  There has been disagreement whether the bulk transfer laws should be applied to security as well as to sale transactions. In most states security transactions have not been covered; in a few states the opposite result has been reached either by judicial construction or by express statutory provision. Whatever the reasons may be, it seems to be true that the bulk transfer type of fraud has not often made its appearance in the security field; it may be that lenders of money are more inclined to investigate a potential borrower than are purchasers of retail stores to determine the true state of their vendor's affairs. Since compliance with the bulk transfer laws is onerous and expensive, legitimate financing transactions should not be required to comply when there is not reason to believe that other creditors will be prejudiced.
  This section merely reiterates the provisions of Article 6 on Bulk Transfers which provides in Section 6-103(1) that transfers "made to give security for the performance of an obligation" are not subject to that article.
  Cross reference:
  Section 6-103(1).
  Definitional cross reference:
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text made no changes in this section.
  "Section 36-9-112. Where collateral is not owned by debtor.
  Unless otherwise agreed, when a secured party knows that collateral is owned by a person who is not the debtor, the owner of the collateral is entitled to receive from the secured party any surplus under Section 36-9-502(2) or under Section 36-9-504(1), and is not liable for the debt or for any deficiency after resale, and he has the same right as the debtor:
  (a) to receive statements under Section 36-9-208;
  (b) to receive notice of and to object to a secured party's proposal to retain the collateral in satisfaction of the indebtedness under Section 36-9-505;
  (c) to redeem the collateral under Section 36-9-506;
  (d) to obtain injunctive or other relief under Section 36-9-507(1);
  (e) to recover losses caused to him under Section 36-9-208(2)."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. Under the definition of Section 9-105, in any provisions of the article dealing with the collateral the term "debtor" means the owner of the collateral even though he is not the person who owes payment or performance of the obligation secured. The section covers several situations in which the implications of this definition are specifically set out.
  The duties which this section imposes on a secured party toward such an owner of collateral are conditioned on the secured party's knowledge of the true state of facts. Short of such
knowledge he may continue to deal exclusively with the person who owes the obligation. Nor does the section suggest that the secured party is under any duty of inquiry. It does not purport to cut across the law of conversion or of ultra vires. Whether a person who does not own property has authority to encumber it for his own debts and whether a person is free to encumber his property as collateral for the debts of another are matters to be decided under other rules of law and are not covered by this section.
  The section does not purport to be an exhaustive treatment of the subject. It isolates certain problems which may be expected to arise and states rules as to them. Others will no doubt arise; their solution is left to the courts.
  Cross references:
  Sections 9-105, 9-208, and Part 5.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Notice": Section 1-201.
  "Person": Section 1-201.
  "Receive notice": Section 1-201.
  "Right": Section 1-201.
  "Secured party": Section 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text made no changes in this section.
  "Section 36-9-113. Security interests arising under chapter on sales.
  A security interest arising solely under the chapter on Sales (Chapter 2) is subject to the provisions of this chapter except that to the extent that and so long as the debtor does not have or does not lawfully obtain possession of the goods:
  (a) no security agreement is necessary to make the security interest enforceable;
  (b) no filing is required to perfect the security interest;
  (c) the rights of the secured party on default by the debtor are governed by the chapter on Sales (Chapter 2)."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. Under the provisions of Article 2 on Sales, a seller of goods may reserve a security interest (see, e.g., Sections 2-401 and 2-505); and in certain circumstances, whether or not a security interest is reserved, the seller has rights of resale and stoppage under Sections 2-703, 2-705, and 2-706 which are similar to the rights of a secured party. Similarly, under such sections as Sections 2-506, 2-707, and 2-711, a financing agency, an agent, a buyer, or another person may have a security interest or other right in goods similar to that of a seller. The use of the term "security interest" in the Sales Article is meant to bring the interests so designated within this article. This section makes it clear, however, that such security interests are exempted from certain provisions of this article. Compare Section 4-208(3), making similar special provisions for security interests arising in the bank collection process.
  2. The security interests to which this section applies commonly arise by operation of law in the course of a sales transaction. Since the circumstances under which they arise are defined in the Sales Article, there is no need for the "security agreement" defined in Section 9-105(1)(l) and required by Section 9-203(1), and paragraph (a) dispenses with such requirements. The requirement of filing may be inapplicable under Sections 9-302(1)(a) and (b),
9-304, and 9-305, where the goods are in the possession of the secured party or of a bailee other than the debtor. To avoid difficulty in the residual cases, as for example where a bailee does not receive notification of the secured party's interest until after the security interest arises, paragraph (b) dispenses with any filing requirement. Finally, paragraph (c) makes inapplicable the default provisions of Part 5 of this article, since the Sales Article contains detailed provisions governing stoppage of delivery and resale after breach. See Sections 2-705, 2-706, 2-707(2), and 2-711(3).
  3. These limitations on the applicability of this article to security interests arising under the Sales Article are appropriate only so long as the debtor does not have or lawfully obtain possession of the goods. Compare Section 56(b) of the Uniform Sales Act. A secured party who wishes to retain a security interest after the debtor lawfully obtains possession must comply fully with all the provisions of this article and ordinarily must file a financing statement to perfect his interest. This is the effect of the "except" clause in the preamble to this section. Note that in the case of a buyer who has a security interest in rejected goods under Section 2-711(3), the buyer is the "secured party" and the seller is the "debtor".
  4. This section applies only to a "security interest". The definition of "security interest" in Section 1-201(37) expressly excludes the special property interest of a buyer of goods on identification under Section 2-401(1). The seller's interest after identification and before delivery may be more than a security interest by virtue of explicit agreement under Section 2-401(1) or 2-501(1), by virtue of the provisions of Section 2-401(2), (3), or (4), or by virtue of substitution pursuant to Section 2-501(2). In such cases,
Article 9 is inapplicable by the terms of Section 9-102(1)(a).
  5. Where there is a "security interest", this section applies only if the security interest arises "solely" under the Sales Article. Thus Section 1-201(37) permits a buyer to acquire by agreement a security interest in goods not in his possession or control; such a security interest does not impair his rights under the Sales Article, but any rights based on the security agreement are fully subject to this article without regard to the limitations of this section. Similarly, a seller who reserves a security interest by agreement does not lose his rights under the Sales Article, but rights other than those conferred by the Sales Article depend on full compliance with this article.
  Cross references:
  Point 1: Sections 2-401, 2-505, 2-506, 2-705, 2-706, 2-707, 2-711(3), 4-208(3).
  Point 2: Sections 2-705, 2-706, 2-707(2), 2-711(3), 9-203(1), 9-302(1)(a) and (b), 9-304, 9-305, and Part 5.
  Point 3: Section 2-711(3).
  Point 4: Sections 2-401, 2-501, and 9-102(1)(a).
  Definitional cross references:
  "Debtor": Section 9-105.
  "Goods": Section 9-105.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text made no changes in this section.
  "Section 36-9-114. Consignment.
  (1) A person who delivers goods under a consignment which is not a security interest and who would be required to file under this chapter by
paragraph (3)(c) of Section 36-2-326 has priority over a secured party who is or becomes a creditor of the consignee and who would have a perfected security interest in the goods if they were the property of the consignee, and also has priority with respect to identifiable cash proceeds received on or before delivery of the goods to a buyer, if
    (a) the consignor complies with the filing provision of the chapter on Sales with respect to consignments (paragraph (3)(c) of Section 36-2-326) before the consignee receives possession of the goods;
    (b) the consignor gives notification in writing to the holder of the security interest if the holder has filed a financing statement covering the same types of goods before the date of the filing made by the consignor;
    (c) the holder of the security interest receives the notification within five years before the consignee receives possession of the goods;
    (d) the notification states that the consignor expects to deliver goods on consignment to the consignee, describing the goods by item or type.
  (2) In the case of a consignment which is not a security interest and in which the requirements of the preceding subsection have not been met, a person who delivers goods to another is subordinate to a person who would have a perfected security interest in the goods if they were the property of the debtor."
OFFICIAL COMMENT
  Prior Uniform Statutory Provisions: None.
  Purposes. This section requires that where goods are furnished to a merchant under the arrangement known as consignment rather than in a security transaction, the consignor must, in order to protect his position as against an
inventory secured party of the consignee, give to that party the same notice and at the same time that he would give to that party if that party had filed first with respect to inventory and if the consignor were furnishing the goods under an inventory security agreement instead of under a consignment.
  For the distinction between true consignment and security arrangements, see Section 1-201(37). For the assimilation of consignments under certain circumstances to goods on sale or return and the requirement of filing in the case of consignments, see Section 2-326.
  The requirements of notice in this section conform closely to the concepts and the language of Section 9-312(3), which should be consulted together with the relevant comments.
  Except in the limited cases of identifiable cash proceeds received on or before delivery of the goods to a buyer, no attempt has been made to provide rules as to perfection of a claim to proceeds of consignments (compare Section 9-306) or the priority thereof (compare Section 9-312). It is believed that under many true consignments the consignor acquires a claim for an agreed amount against the consignee at the moment of sale, and does not look to the proceeds of sale. In contrast to the assumption of this article that rights to proceeds of security interests under Section 9-306 represent the presumed intent of the parties [compare Section 9-203(3)], the article goes on the assumption that if consignors intend to claim the proceeds of sale, they will do so by expressly contracting for them and will perfect their security interests therein.
  Cross references:
  Sections 2-326 and 9-312(3).
  Definitional cross references:
  "Consignment": Section 1-201(37).
  "Debtor": Section 9-105.
  "Goods": Section 9-105.
  "Notification": Section 1-201(26).
  "Proceeds": Section 9-306.
  "Security interest": Section 1-201(37).
SOUTH CAROLINA REPORTER'S NOTES
  This section is new. An uncertainty has existed under the 1962 Text whether the filing rule in Section 2-326(3) applicable to true consignments requires only filing under Part 4 of Article 9 or also requires notice to prior inventory secured parties of the debtor under Section 9-312(3). The new Section 9-114 accepts the latter view, and provides in substance that, in order to protect his ownership rights in the consigned goods against the claims of the consignee's creditors claiming a security interest in the consignee's goods the consignor must give the same notice to secured parties of the debtor that he would have to give if the transaction created a security interest rather than a true consignment and the consignor wanted to qualify as a purchase money inventory financer under Section 9-313(3). The notice requirements in new Section 9-114 are essentially the same as that in Section 9-312(3).
  2. See the South Carolina Reporter's Notes to Section 9-408, the Introduction, and the Reporter's Notes to Section 9 of this act for a discussion of the interplay between the South Carolina Bailment Statute, Section 27-23-80 of the 1976 South Carolina Code and Article 9 of the UCC. The notice requirements imposed by this section are in addition to the filing requirements of Section 2-236 and in Section 27-23-80.
"Part 2
Validity of Security Agreement
and Rights of Parties
Under the Security Agreement
  Section 36-9-201. General validity of security agreement.
  Except as otherwise provided by this title a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors. Nothing in this chapter validates any charge or practice illegal under any statute or regulation under the statute governing usury, small loans, retail installment sales, or the like, or extends the application of any statute or regulation to any transaction not otherwise subject to the statute or regulation."
OFFICIAL COMMENT
  Prior Uniform Statutory Provisions: Section 4, Uniform Conditional Sales Act; Section 3, Uniform Trust Receipts Act.
  Purposes. This section states the general validity of a security agreement. In general the security agreement is effective between the parties; it is likewise effective against third parties. Exceptions to this general rule arise where there is a specific provision in any article of this act, for example, where Article 1 invalidates a disclaimer of the obligations of good faith, etc. [Section 1-102(3)], or this article subordinates the security interest because it has not been perfected (Section 9-301) or for other reasons (see Section 9-312 on priorities) or defeats the security interest where certain types of claimants are involved (for example Section 9-307 on buyers of goods). As pointed out in the note to Section 9-102,
there is no intention that the enactment of this article should repeal retail installment selling acts or small loan acts. Nor of course are the usury laws of any state repealed. These are mentioned in the text of Section 9-201 as examples of applicable laws, outside this code entirely, which might invalidate the terms of a security agreement.
  Cross references:
  Sections 1-102(3), 9-301, 9-307, and 9-312.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Creditor": Section 1-201.
  "Party": Section 1-201.
  "Purchaser": Section 1-201.
  "Security agreement": Section 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text made no change in this section.
  "Section 36-9-202. Title to collateral immaterial.
  Each provision of this chapter with regard to rights, obligations, and remedies applies whether title to collateral is in the secured party or in the debtor."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 4, Uniform Conditional Sales Act; Section 3, Uniform Trust Receipts Act.
  Purposes. The rights and duties of the parties to a security transaction and of third parties are stated in this article without reference to the location of "title" to the collateral. Thus the incidents of a security interest which secures the purchase price of goods are the same under this article whether the secured party appears to have retained title or the debtor
appears to have obtained title and then conveyed it or a lien to the secured party. This article in no way determines which line of interpretation (title theory v. lien theory or retained title v. conveyed title) should be followed in cases where the applicability of some other rule of law depends upon who has title. Thus if 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 determine the location of "title" for such purposes.
  Petitions for reclamation brought by a secured party in his debtor's insolvency proceedings have often been granted or denied on a title theory; where the secured party has title, reclamation will be granted; where he has "merely a lien", reclamation may be denied. For the treatment of such petitions under this article, see Point 1 of comment to Section 9-507.
  Cross references:
  Sections 2-401 and 2-507.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Remedy": Section 1-201.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
  "Section 36-9-203. Attachment and enforceability of security interest; proceeds; formal requisites.
  (1) Subject to the provisions of Section 36-4-208 on the security interest of a collecting bank and Section 36-9-113 on a security interest arising under the chapter on Sales, a security interest is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless:
    (a) the collateral is in the possession of the secured party pursuant to agreement, or
      the debtor has signed a security agreement which contains a description of the collateral and in addition, when the security interest covers crops growing or to be grown or timber to be cut, a description of the land concerned;
    (b) value has been given;
    (c) the debtor has rights in the collateral.
  (2) A security interest attaches when it becomes enforceable against the debtor with respect to the collateral. Attachment occurs as soon as all of the events specified in subsection (1) have taken place unless explicit agreement postpones the time of attaching.
  (3) Unless otherwise agreed a security agreement gives the secured party the rights to proceeds provided by Section 36-9-306.
  (4) A transaction, although subject to this chapter, is also subject to statutes or regulations governing usury, small loans, retail installment sales or the like, including without limitation, Title 34 and Title 37, and in the case of conflict between the provisions of this chapter and any statute, the provisions of the statute control. Failure to comply with any applicable statute has only the effect which is specified in the statute."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 2, Uniform Trust Receipts Act.
  Purposes. 1. Subsection (1) states three basic prerequisites to the existence of a security interest: agreement, value, and collateral. In addition, the agreement must be in writing unless the collateral is in the possession of the secured party (including an agent on his behalf - see Comment 2 to Section 9-305). When all of these elements exist, the security agreement becomes enforceable between the parties and is said to "attach". Perfection of a security interest (see Section 9-303) will in many cases depend on the additional step of filing a financing statement (see Section 9-302) or possession of the collateral (Sections 9-304(1) and 9-305). Section 9-301 states who will take priority over a security interest which has attached but which has not been perfected. Subsection (2) states a rule of construction under which the security interest, unless postponed by explicit agreement, attaches automatically when the stated events have occurred.
  2. As to the type of description of collateral in a written security agreement which will satisfy the requirements of this section, see Section 9-110 and comment thereto.
  In the case of crops growing or to be grown or timber to be cut the best identification is by describing the land, and subsection (1)(a) requires such a description.
  3. One purpose of the formal requisites stated in subsection (1)(a) is evidentiary. The requirement of written record minimizes 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. Where the collateral is in the possession of the secured party, the evidentiary
need for a written record is much less than where the collateral is in the debtor's possession; customarily, of course, as a matter of business practice the written record will be kept, but, in this article as at common law, the writing is not a formal requisite. Subsection (1)(a), therefore, dispenses with the written agreement - and thus with signature and description - if the collateral is in the secured party's possession.
  4. The definition of "security agreement" (Section 9-105) is "an agreement which creates or provides for a security interest". Under that definition the requirement of this section that the debtor sign a security agreement is not intended to reject, and does not reject, the deeply rooted doctrine that a bill of sale although absolute in form may be shown to have been in fact 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 and may then, on payment of the debt, assert his fundamental right to return of the collateral and execution of an acknowledgment of satisfaction.
  5. The formal requisite of a writing stated in this section is not only a condition to the enforceability of a security interest against third parties, it is in the nature of a Statute of Frauds. Unless the secured party is in possession of the collateral, his security interest, absent a writing which satisfies paragraph (1)(a), is not enforceable even against the debtor, and cannot be made so on any theory of equitable mortgage or the like. If he has advanced money, he is of course a creditor and, like any creditor, is entitled after judgment to appropriate process to enforce his claim against his debtor's assets; he will not, however, have against his debtor the rights given a secured party by Part 5 of this Article on Default. The theory of equitable mortgage,
insofar as it has operated to allow creditors to enforce informal security agreements against debtors, may well have developed as a necessary escape from the elaborate requirements of execution, acknowledgment, and the like which the nineteenth century chattel mortgage acts vainly relied on as a deterrent to fraud. Since this article reduces formal requisites to a minimum, the doctrine is no longer necessary or useful. More harm than good would result from allowing creditors to establish a secured status by parol evidence after they have neglected the simple formality of obtaining a signed writing.
  6. Subsection (4) states that the provisions of regulatory statutes covering the field of consumer finance prevail over the provisions of this article in case of conflict. The second sentence of the subsection is added to make clear that no doctrine of total voidness for illegality is intended; failure to comply with the applicable regulatory statute has whatever effect may be specified in that statute, but no more.
  Cross references:
  Sections 4-208 and 9-113.
  Point 1: Section 9-110.
  Point 5: Part 5.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Party": Section 1-201.
  "Proceeds": Section 9-306.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
  "Signed": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. Subsection (1) has been revised to incorporate into the concept of enforceability of a security interest the elements of
agreement, value, and rights in the collateral, which formerly were stated in Section 9-204. These are combined with the requirement of written agreement (unless the security interest is evidenced by possession of the collateral by the secured party), and the security interest is said to "attach" when all of the events specified have occurred. This drafting cures the former anomaly that a security interest could attach and be perfected, and yet be unenforceable against anyone for lack of a written security agreement. This result was possible because the only requirement for enforceability in the 1962 Text of this section was satisfaction of the writing requirement in existing Section 9-203.
  2. The requirement is subsection 1(b) of the 1962 Text that a security agreement covering oil, gas, or minerals to be extracted contain a description of the land concerned has been eliminated since Article 9 does not recognize a security interest in such collateral until it has been extracted from the land. However, the description requirement was retained for crops and land. See Section 9-110 and the South Carolina Reporter's Notes to Section 9-402 of the 1972 Text for explanation of the standards applied to determine the sufficiency of the land description.
  3. The reference to proceeds in subsection (1) of the 1962 Text has been eliminated and new subsection (3) added to make clear that claims to proceeds under Section 9-306 do not require a statement in the security agreement, for it is assumed that the parties so intend unless otherwise agreed. The requirement that proceeds be claimed on a financing statement has also been eliminated in the 1972 Text. See the South Carolina Reporter's Notes to Section 9-306 of the 1972 Text infra.
  4. The wording in subsection (4) (subsection (2) of the 1962 Text) adopted in South Carolina
(see Section 36-9-203(2) of the 1976 South Carolina Code), which makes the UCC subject to the provisions of certain related statutes dealing with financing, principally the South Carolina statutes dealing with interest and usury, has been revised slightly in order to direct the reader to the two titles of the South Carolina Code of Laws which contain the vast majority of the applicable statutes. See the South Carolina Reporter's Notes to Sections 1-105 and 9-318 for specific examples of situations where these other South Carolina statutes would alter the normal UCC rule.
  "Section 36-9-204. After-acquired property; future advances. (1) Except as provided in subsection (2), a security agreement may provide that any or all obligations covered by the security agreement are to be secured by after-acquired collateral.
  (2) No security interest attaches under an after-acquired property clause to consumer goods other than accessions (Section 36-9-314) when given as additional security unless the debtor acquires rights in them within ten days after the secured party gives value.
  (3) Obligations covered by a security agreement may include future advances or other value whether or not the advances or value are given pursuant to commitment (subsection (1) of Section 36-9-105)."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. Subsection (1) makes clear that a security interest arising by virtue of an after-acquired property clause has equal status with a security interest in collateral in which the debtor has rights at the time value is given under the security agreement. That is to say: the security interest in after-acquired property
is not merely an "equitable" interest; no further action by the secured party - such as the taking of a supplemental agreement covering the new collateral - is required. This does not however mean that the interest is proof against subordination or defeat; Section 9-108 should be consulted on when a security interest in after-acquired collateral is not security for antecedent debt, and Section 9-312(3) and (4) on when such a security interest may be subordinated to a conflicting purchase money security interest in the same collateral.
  2. This article accepts the principle of a "continuing general lien". It rejects the doctrine - of which the judicial attitude toward after-acquired property interests was one expression - that there is reason to invalidate as a matter of law what has been variously called the floating charge, the free-handed mortgage and the lien on a shifting stock. This article validates a security interest in the debtor's existing and future assets, even though (see Section 9-205) the debtor has liberty to use or dispose of collateral without being required to account for proceeds or substitute new collateral. (See further, however, Section 9-306 on Proceeds and comment thereto.)
  The widespread nineteenth century prejudice against the floating charge was based on a feeling, often inarticulate in the opinions, that a commercial borrower should not be allowed to encumber all his assets present and future, and that for the protection not only of the borrower but of his other creditors a cushion of free assets should be preserved. That inarticulate premise has much to recommend it. This article decisively rejects it not on the ground that it was wrong in policy but on the ground that it was not effective. In pre-code law there was a multiplication of security devices designed to avoid the policy: field warehousing, trust receipts, factor's lien acts
and so on. The cushion of free assets was not preserved. In almost every state it was possible before the code for the borrower to give a lien on everything he held or would have. There have no doubt been sufficient economic reasons for the change. This article, in expressly validating the floating charge, merely recognizes an existing state of things. The substantive rules of law set forth in the balance of the article are designed to achieve the protection of the debtor and the equitable resolution of the conflicting claims of creditors which the old rules no longer give.
  Notice that the question of assignment of future accounts is treated like any other case of after-acquired property; no periodic list of accounts is required by this act. Where less than all accounts are assigned such a list may of course be necessary to permit identification of the particular accounts assigned.
  3. Subsection (1) has been already referred to in connection with after-acquired property. It also serves to validate the so-called "cross-security" clause under which collateral acquired at any time may secure advances whenever made.
  4. Subsection (2) limits the operation of the after-acquired property clause against consumers. No such interest can be claimed as additional security in consumer goods (defined in Section 9-109), except accessions (see Section 9-314), acquired more than ten days after the giving of value.
  5. Under subsection (3) collateral may secure future as well as present advances when the security agreement so provides. At common law and under chattel mortgage statutes there seems to have been a vaguely articulated prejudice against future advance agreements comparable to the prejudice against after-acquired property interests. Although only a very few jurisdictions went to the length of invalidating
interests claimed by virtue of future advances, judicial limitations severely restricted the usefulness of such arrangements. A common limitation was that an interest claimed in collateral existing at the time the security transaction was entered into for advances made thereafter was good only to the extent that the original security agreement specified the amount of such later advances and even the times at which they should be made. In line with the policy of this article toward after-acquired property interests this subsection validates the future advance interest, provided only that the obligation be covered by the security agreement.
  The effect of after-acquired property and future advance clauses in the security agreement should not be confused with the use of financing statements in notice filing. The references to after-acquired property clauses and future advance clauses in Section 9-204 are limited to security agreements. This section follows Section 9-203, the section requiring a written security agreement, and its purpose is to make clear that confirmatory agreements are not necessary where the basic agreement has the clauses mentioned. This section has no reference to the operation of financing statements. The filing of a financing statement is effective to perfect security interests as to which the other required elements for perfection exist, whether the security agreement involved is one existing at the date of filing with an after-acquired property clause or a future advance clause, or whether the applicable security agreement is executed later. Indeed, Section 9-402(1) expressly contemplates that a financing statement may be filed when there is no security agreement. There is no need to refer to after-acquired property or future advances in the financing statement.
  As in the case of interests in after-acquired collateral, a security interest based on future
advances may be subordinated to conflicting interests in the same collateral. See Sections 9-301(4); 9-307(3); 9-312(3), (4), and (7).
  Cross references:
  Point 1: Sections 9-108 and 9-312.
  Point 2: Sections 9-205 and 9-306.
  Point 4: Sections 9-109 and 9-314.
  Point 5: Sections 9-301(4); 9-307(3); 9-312(3), (4), and (7).
  Definitional cross references:
  "Account": Section 9-106.
  "Agreement": Section 1-201.
  "Collateral": Section 9-105.
  "Consumer goods": Section 9-109.
  "Contract": Section 1-201.
  "Debtor": Section 9-105.
  "Purchase": Section 1-201.
  "Pursuant to commitment":
Section 9-105.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. This section has been extensively revised, and part of the 1962 Text of this section has been moved to Section 9-203 of the 1972 Text. Most of the changes are clarifications of problems that have arisen under the 1962 Text, and the combination of the notifications in Sections 9-203 and 9-204 will not result in any radical change in the operation of secured financing from a practical point of view. An explanation of the changes in this section is set forth in the following paragraphs.
  2. Subsection (1) of the 1962 Text has been eliminated. The term "attach" and the basic elements of attachment have been moved to Section 9-203 and related to the concept of
enforceability of the security interest between the parties to the security agreement contained in that section. See paragraph 1 of the South Carolina Reporter's Notes to Section 9-203 of the 1972 Text.
  3. Subsection (2) of the 1962 Text, which defines when the debtor can first obtain rights in crops, livestock, fish, oil, gas, minerals, contract rights, and accounts has been eliminated as unnecessary and in some cases confusing. Its operation appeared to be arbitrary, and it is believed that the questions considered are best left to the courts.
  4. Subsection (3), which authorizes after-acquired property clauses, and (5), which authorizes both obligatory and nonobligatory future advance clauses in security agreements, have been redesignated in the 1972 Text as subsections (1) and (3) and have been rewritten for clarity.
  5. Former subsection (4) is redesignated (2) and clause (a) thereof relating to crops eliminated. That clause provides that no security interest in crops attaches under an after-acquired property clause to crops which became such more than seven years after the security agreement (the limitation is one year in the Official 1962 Text), unless the agreement involved certain real estate transactions. The obvious purpose of this provision is to protect a necessitous farmer from encumbering his crops for too many years in the future. There is no compelling reason to limit the time periods for crop mortgages or to differentiate between crop mortgages that are given in conjunction with a lease or in conjunction with a real estate mortgage and other types of crop mortgages; and in any case a financing statement is only effective for five years. Hence the elimination of any time limitation is reasonable and simplifies the handling of such transactions. In this connection, Section 9-401 of the 1972
Text continues the practice of the 1962 Text of treating crop mortgages as chattel financing and therefore not requiring that such security interests be filed and included in the real estate records. This is consistent with pre-UCC South Carolina law. See the South Carolina Reporter's Notes to Section 9-401.
  "Section 36-9-205. Use of disposition of collateral without accounting permissible.
  A security interest is not invalid or fraudulent against creditors by reason of liberty in the debtor to use, commingle, or dispose of all or part of the collateral (including returned or repossessed goods) or to collect or compromise accounts or chattel paper, or to accept the return of goods or make repossessions, or to use, commingle, or dispose of proceeds, or by reason of the failure of the secured party to require the debtor to account for proceeds or replace collateral. This section does not relax the requirements of possession where perfection of a security interest depends upon possession of the collateral by the secured party or by a bailee."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. This article expressly validates the floating charge or lien on a shifting stock. (See Sections 9-201, 9-204, and comment to Section 9-204.) This section provides that a security interest is not invalid or fraudulent by reason of liberty in the debtor to dispose of the collateral without being required to account for proceeds or substitute new collateral. It repeals the rule of Benedict v. Ratner, 268 U.S. 353, 45 S.Ct. 566, 69 L.Ed. 991 (1925), and other cases which held such arrangements void as a matter of law because the debtor was given unfettered dominion or control over the
collateral. The principal effect of the Benedict rule has been, not to discourage or eliminate security transactions in inventory and accounts receivable - on the contrary such transactions have vastly increased in volume - but rather to force financing arrangements in this field toward a self-liquidating basis. Furthermore, several lower court cases drew implications from Justice Brandeis' opinion in Benedict v. Ratner which required lenders operating in this field to observe a number of needless and costly formalities: for example it was thought necessary for the debtor to make daily remittances to the lender of all collections received, even though the amount remitted is immediately returned to the debtor in order to keep the loan at an agreed level.
  2. The Benedict rule was, in the accounts receivable field, repealed in many of the state accounts receivable statutes enacted after 1943, and, in the inventory field, by some of the factor's lien statutes. (Benedict v. Ratner purported to state the law of New York and not a rule of federal bankruptcy law. Since its acceptance is a matter of state law, it can of course be rejected by state statute.)
  3. The requirement of "policing" is the substance of the Benedict rule. While this section repeals Benedict in matters of form, the filing requirements (Section 9-302) give other creditors the opportunity to ascertain from public sources whether property of their debtor or prospective debtor is subject to secured claims, and the provisions about proceeds [Section 9-306(4)] enable creditors to claim collections which were made by the debtor more than ten days before insolvency proceedings and commingled or deposited in a bank account before institution of the insolvency proceedings. The repeal of the Benedict rule under this section must be read in the light of these provisions.
  4. Other decisions reaching results like that in the Benedict case, but relating to other aspects of dominion (of which Lee v. State Bank & Trust Co., 54 F. 2d 518 (2d Cir. 1931), is an example) are likewise rejected.
  5. Nothing in Section 9-205 prevents such "policing" or dominion as the secured party and the debtor may agree upon; business and not legal reasons will determine the extent to which strict accountability, segregation of collections, daily reports, and the like will be employed.
  6. The last sentence is added to make clear that the section does not mean that the holder of an unfiled security interest, whose perfection depends on possession of the collateral by the secured party or by a bailee (such as a field warehouseman), can allow the debtor access to and control over the goods without thereby losing his perfected interest. The common law rules on the degree and extent of possession which are necessary to perfect a pledge interest or to constitute a valid field warehouse are not relaxed by this or any other section of this article.
  Cross references:
  Point 1: Sections 9-201 and 9-204.
  Point 3: Sections 9-302 and 9-306(4).
  Point 6: Sections 9-304 and 9-305.
  Definitional cross references:
  "Account": Section 9-106.
  "Chattel paper": Section 9-105.
  "Collateral": Section 9-105.
  "Creditor": Section 1-201.
  "Debtor": Section 9-105.
  "Goods": Section 9-105.
  "Proceeds": Section 9-306.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The change in wording reflects the deletion of the defined term "contract right" from Article 9. See the South Carolina Reporter's Notes to Section 9-106 of the 1972 Text.
  "Section 36-9-206. Agreement not to assert defenses against assignee; modification of sales warranties where security agreement exists.
  (1) Subject to any statute or decision which establishes a different rule for buyers or lessees of consumer goods, an agreement by a buyer or lessee that he will not assert against an assignee any claim or defense which he may have against the seller or lessor is enforceable by an assignee who takes his assignment for value, in good faith and without notice of a claim or defense, except as to defenses of a type which may be asserted against a holder in due course of a negotiable instrument under the chapter on Commercial Paper (Chapter 3). A buyer who as part of one transaction signs both a negotiable instrument and a security agreement makes such an agreement.
  (2) When a seller retains a purchase money security interest in goods the chapter on Sales (Chapter 2) governs the sale and any disclaimer, limitation, or modification of the seller's warranties."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 2, Uniform Conditional Sales Act.
  Purposes. 1. Clauses are frequently inserted in installment purchase contracts under which the conditional vendee agrees not to assert defenses against an assignee of the contract. These clauses have led to litigation and their present status under the case law is in confusion. In some jurisdictions they have been
held void as attempts to create negotiable instruments outside the framework of Article 3 or on grounds of public policy; in others they have been allowed to operate to cut off at least defenses based on breach of warranty. Under subsection (1) such clauses in a security agreement are validated outside the consumer field, but only as to defenses which could be cut off if a negotiable instrument were used. This limitation is important since, if the clauses were allowed to have full effect as typically drafted, they would operate to cut off real as well as personal defenses. The execution of a negotiable note in connection with a security agreement is given like effect as the execution of an agreement containing a waiver of defense clause. The same rules are made applicable to leases as to security agreements, whether or not the lease is intended as security.
  2. This article takes no position on the controversial question whether a buyer of consumer goods may effectively waive defenses by contractual clause or by execution of a negotiable note. In some states such waivers have been invalidated by statute. In other states the course of judicial decision has rendered them ineffective or unreliable - courts have found that the assignee is not protected against the buyer's defense by a clause in the contract or that the holder of a note, by reason of this too close connection with the underlying transaction, does not have the rights of a holder in due course. This article neither adopts nor rejects the approach taken in such statutes and decisions, except that the validation of waivers in subsection (1) is expressly made "subject to any statute or decision" which may restrict the waiver's effectiveness in the case of a buyer of consumer goods.
  3. Subsection (2) makes clear, as did Section 2 of the Uniform Conditional Sales Act, that purchase money security transactions are sales, and warranty rules for sales are applicable. It also prevents a buyer from inadvertently abandoning his warranties by a "no warranties" term in the security agreement when warranties have already been created under the sales arrangement. Where the sales arrangement and the purchase money security transaction are evidenced by only one writing, that writing may disclaim, limit, or modify warranties to the extent permitted by Article 2.
  Cross references:
  Point 1: Section 3-305.
  Point 2: Section 9-203(2).
  Point 3: Sections 2-102 and 2-316.
  Definitional cross references:
  "Agreement": Section 1-201.
  "Consumer goods": Section 9-109.
  "Good faith": Section 1-201.
  "Goods": Section 9-105.
  "Holder": Section 1-201.
  "Holder in due course": Sections 3-302 and 9-105.
  "Negotiable instrument":
Section 3-104.
  "Notice": Section 1-201.
  "Purchase money security interest":
Section 9-107.
  "Sale": Sections 2-106 and 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no changes in this section. See however, the South Carolina Reporter's Notes to Section 9-318.
  "Section 36-9-207. Rights and duties when collateral is in secured party's possession.
  (1) A secured party must use reasonable care in the custody and preservation of collateral in his possession. In the case of an instrument or chattel paper reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed.
  (2) Unless otherwise agreed, when collateral is in the secured party's possession:
    (a) reasonable expenses (including the cost of any insurance and payment of taxes or other charges) incurred in the custody, preservation, use, or operation of the collateral are chargeable to the debtor and are secured by the collateral;
    (b) the risk of accidental loss or damage is on the debtor to the extent of any deficiency in any effective insurance coverage;
    (c) the secured party may hold as additional security any increase or profits (except money) received from the collateral, but money so received, unless remitted to the debtor, must be applied in reduction of the secured obligation;
    (d) the secured party must keep the collateral identifiable, but fungible collateral may be commingled;
    (e) the secured party may repledge the collateral upon terms which do not impair the debtor's right to redeem it.
  (3) A secured party is liable for any loss caused by his failure to meet any obligation imposed by the preceding subsections but does not lose his security interest.
  (4) A secured party may use or operate the collateral for the purpose of preserving the collateral or its value or pursuant to the order of a court of appropriate jurisdiction or, except in the case of consumer goods, in the manner and to the extent provided in the security agreement."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. Subsection (1) states the duty to preserve collateral imposed on a pledge at common law. See Restatement of Security, Sections 17, 18. In many cases a secured party having collateral in his possession may satisfy this duty by notifying the debtor of any act which must be taken and allowing the debtor to perform such act himself. If the secured party himself takes action, his reasonable expenses may be added to the secured obligation.
  Under Section 1-102(3) the duty to exercise reasonable care may not be disclaimed by agreement, although under that section the parties remain free to determine by agreement, in any manner not manifestly unreasonable, what shall constitute reasonable care in a particular case.
  2. Subsection (2) states rules, which follow common law precedents, and which apply, unless there is agreement otherwise, in typical situations during the period while the secured party is in possession of the collateral.
  3. The right of a secured party holding instruments or documents to have them endorsed or transferred to him or his order is dealt with in the relevant sections of Articles 3 (Commercial Paper), 7 (Warehouse Receipts, Bills of Lading, and Other Documents), and 8 (Investment Securities). (Sections 3-201, 7-506, 8-307.)
  4. This section applies when the secured party has possession of the collateral before default, as a pledgee, and also when he has taken possession of the collateral after default. See Section 9-501(1) and (2). Subsection (4) permits operation of the collateral in the circumstances stated, and subsection (2)(a) authorizes payment of or provision for expenses of such operation.
Agreements providing for such operation are common in trust indentures securing corporate bonds and are particularly important when the collateral is a going business. Such an agreement cannot of course disclaim the duty of care established by subsection (1), nor can it waive or modify the rights of the debtor contrary to Section 9-501(3).
  Cross references:
  Point 1: Section 1-102(3).
  Point 3: Sections 3-201, 7-506, and 8-307.
  Point 4: Section 9-501(2) and Part 5.
  Definitional cross references:
  "Chattel paper": Section 9-105.
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Instrument": Section 9-105.
  "Money": Section 1-201.
  "Party": Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no changes in this section.
  "Section 36-9-208. Request for statement of account or list of collateral.
  (1) A debtor may sign a statement indicating what he believes to be the aggregate amount of unpaid indebtedness as of a specified date and may send it to the secured party with a request that the statement be approved or corrected and returned to the debtor. When the security agreement or any other record kept by the secured party identifies the collateral a debtor may similarly request the secured party to approve or correct a list of the collateral.
  (2) The secured party must comply with a request within two weeks after receipt by sending a written correction or approval. If the secured party claims a security interest in
all of a particular type of collateral owned by the debtor he may indicate that fact in his reply and need not approve or correct an itemized list of the collateral. If the secured party without reasonable excuse fails to comply he is liable for any loss caused to the debtor by noncompliance. If the debtor has properly included in his request a good faith statement of the obligation or a list of the collateral, or both, the secured party may claim a security interest only as shown in the statement against persons misled by his failure to comply. If he no longer has an interest in the obligation or collateral at the time the request is received he must disclose the name and address of any successor in interest known to him, and he is liable for any loss caused to the debtor as a result of failure to disclose. A successor in interest is not subject to this section until a request is received by him.
  (3) A debtor is entitled to a statement once every six months without charge. The secured party may require payment of a charge not exceeding ten dollars for each additional statement furnished."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. To provide a procedure whereby a debtor may obtain from the secured party a statement of the amount due on the obligation and in some cases a statement of the collateral.
  2. The financing statement required to be filed under this article (see Section 9-402) may disclose only that a secured party may have a security interest in specified types of collateral owned by the debtor. Unless a copy of the security agreement itself is filed as the financing statement third parties are told neither the amount of the obligation secured nor which particular assets are covered. Since
subsequent creditors and purchasers may legitimately need more detailed information, it is necessary to provide a procedure under which the secured party will be required to make disclosure. On the other hand, the secured party should not be under a duty to disclose details of business operations to any casual inquirer or competitor who asks for them. This section gives the right to demand disclosure only to the debtor, who will typically request a statement in connection with negotiations with subsequent creditors and purchasers, or for the purpose of establishing his credit standing and proving which of his assets are free of the security interest. The secured party is further protected against onerous requests by the provisions that he need furnish a statement of collateral only when his own records identify the collateral and that if he claims all of a particular type of collateral owned by the debtor he is not required to approve an itemized list.
  Cross reference:
  Point 2: Section 9-402.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Good faith": Section 1-201.
  "Know": Section 1-201.
  "Person": Section 1-201.
  "Receive": Section 1-201.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
  "Send": Section 1-201.
  "Written": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
"Part 3
Rights of Third Parties;
Perfected and Unperfected
Security Interests; Rules of Priority
  Section 36-9-301. Persons who take priority over unperfected security interests; rights of 'lien creditor'.
  (1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of:
    (a) persons entitled to priority under Section 36-9-312;
    (b) a person who becomes a lien creditor before the security interest is perfected;
    (c) in the case of goods, instruments, documents, and chattel paper, a person who is not a secured party and who is a transferee in bulk or other buyer not in ordinary course of business or is a buyer of farm products in ordinary course of business, to the extent that he gives value and receives delivery of the collateral without knowledge of the security interest and before it is perfected;
    (d) in the case of accounts and general intangibles, a person who is not a secured party and who is a transferee to the extent that he gives value without knowledge of the security interest and before it is perfected.
  (2) If the secured party files with respect to a purchase money security interest before or within ten days after the debtor receives possession of the collateral, he takes priority over the rights of a transferee in bulk or of a lien creditor which arise between the time the security interest attaches and the time of filing.
  (3) A 'lien creditor' means a creditor who has acquired a lien on the property involved by attachment, levy, or the like and includes an assignee for benefit of creditors from the time of assignment, and a trustee in bankruptcy from the date of the filing of the petition or a receiver in equity from the time of appointment.
  (4) A person who becomes a lien creditor while a security interest is perfected takes subject to the security interest with respect to both prior and future advances. Knowledge by the secured party of the lien does not impair the priority of the security interest with respect to advances thereafter made."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Sections 8(2) and 9(2)(b), Uniform Trust Receipts Act; Section 5, Uniform Conditional Sales Act.
  Purposes. 1. This section lists the classes of persons who take priority over an unperfected security interest. As in Section 60 of the Federal Bankruptcy Act, the term "perfected" is used to describe a security interest in personal property which cannot be defeated in insolvency proceedings or in general by creditors. A security interest is "perfected" when the secured party has taken whatever steps are necessary to give him such an interest. These steps are explained in the five following sections (9-302 through 9-306).
  2. Section 9-312 states general rules for the determination of priorities among conflicting security interests and in addition refers to other sections which state special rules of priority in a variety of situations. The interests given priority under Section 9-312 and the other sections therein cited take such priority in general even over a perfected security interest. A fortiori they take
priority over an unperfected security interest, and paragraph (1)(a) of this section so states.
  3. Paragraph (1)(b) provides that an unperfected security interest is subordinate to the rights of lien creditors. The section rejects the rule applied in many jurisdictions in pre-code law that an unperfected security interest is subordinated to all creditors, but requires the lien obtained by legal proceedings to attach to the collateral before the security interest is perfected. The section subordinates the unperfected security interest but does not subordinate the secured debt to the lien.
  4. Paragraphs (1)(c) and (1)(d) deal with purchasers (other than secured parties) of collateral who would take subject to a perfected security interest but who are by these subsections given priority over an unperfected security interest. In the cases of goods and of intangibles of the type whose transfer is effected by physical delivery of the representative piece of paper (instruments, documents, and chattel paper) the purchaser who takes priority must both give value and receive delivery of the collateral without knowledge of the existing security interest and before perfection [paragraph (1)(c)]. Thus even if the purchaser gave value without knowledge and before perfection, he would take subject to the security interest if perfection occurred before physical delivery of the collateral to him. The paragraph (1)(c) rule is obviously 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 (accounts and general intangibles), paragraph (1)(d) gives priority to any transferee who has given value without knowledge and before perfection of the security interest.
  The term "buyer in ordinary course of business" referred to in paragraph (1)(c) is defined in Section 1-201(9).
  Other secured parties are excluded from paragraphs (1)(c) and (1)(d) because their priorities are covered in Section 9-312 (see point 2 of this comment).
  5. Except to the extent provided in subsection (2), this article does not permit a secured party to file or take possession after another interest has received priority under subsection (1) and thereby protect himself against the intervening interest.
  A few chattel mortgage statutes did have grace periods, i.e., a filing within x days after the mortgage was given related back to the day the mortgage was given. The Uniform Conditional Sales Act had a ten-day period which cut off all intervening interests. The Uniform Trust Receipts Act had a thirty-day period but did not cut off the interest of a purchaser who took delivery before the filing.
  Subsection (2) gives a grace period for perfection by filing as to purchase money security interests only (that term is defined in Section 9-107). The grace period runs for ten days after the debtor receives possession of the collateral but operates to cut off only the interests of intervening lien creditors or bulk purchasers.
  6. Subsection (3) defines "lien creditor", following in substance the provisions of the Uniform Trust Receipts Act.
  7. Subsection (4) deals with the question whether advances under an existing security interest in collateral, made after rights of lien creditors have attached to that collateral, will take precedence over rights of lien creditors. See related problems in Sections 9-307(3) and 9-312(7). Note: Official Comment 7 has been modified. See Reporter's Note 6.
  Cross references:
  Section 9-312.
  Point 1: Sections 9-302 through 9-306.
  Point 7: Sections 9-204, 9-307(3), and 9-312(7).
  Definitional cross references:
  "Account": Section 9-106.
  "Buyer in ordinary course of business":
Section 1-201.
  "Chattel paper": Section 9-105.
  "Collateral": Section 9-105.
  "Creditor": Section 1-201.
  "Delivery": Section 1-201.
  "Document": Section 9-105.
  "General intangibles": Section 9-106.
  "Goods": Section 9-105.
  "Instrument": Section 9-105.
  "Knowledge": Section 1-201.
  "Person": Section 1-201.
  "Purchase money security interest":
Section 9-107.
  "Pursuant to commitment": Section 9-105.
  "Representative": Section 1-201.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. This section deals primarily with the issue of determining what types of persons can take priority over an attached but unperfected security interest. The rules resolving priority issues where competing perfected security interests are involved are dealt with in Section 9-312 and related sections.
  2. The most significant change made in this section is the elimination of the element of knowledge from the conditions under which a lien creditor may take priority over an unperfected security interest. This is accomplished by the
amendments in subsections (1)(b) and (3). Knowledge of the security interest will no longer subordinate the lien creditor to the unfiled security interest. The 1962 Text, adopted in South Carolina, denied the lien creditor priority even though he had no knowledge when he got involved by extending credit, if he acquired knowledge of the unperfected security interest in the process of obtaining a lien on the debtor's property. This loss of priority is inconsistent in spirit with the rules of priority between security interests where knowledge plays a very minor role.
  3. The change in subsection (1)(c) with respect to a buyer of farm products is to make it clear that a buyer of farm products in ordinary course of business takes priority over an unperfected security interest in the farm products. Under Section 9-307(1) a buyer of farm products from a farmer or other person involved in farming operations takes subject to a perfected security interest; however buyers in the ordinary course of business of most other types of collateral take free of any security interest created by the seller whether the security interest is perfected or unperfected.
  4. The deletion of the term "contract rights" from subsection (1)(d) is necessary because contract rights have been eliminated as a separate form of collateral in the 1972 Text. See the South Carolina Reporter's Notes to Section 9-106 supra.
  5. The change in subsection (2) dealing with purchase money security interests was made to conform the language in this section with that in Section 9-312(4) which deals with the priority of purchase money security interests. The language in the 1962 Text, which was adopted by South Carolina, ("comes into possession" vs. "receives") creates the possibility of a conflict between the two sections.
  6. New subsection (4) deals with the question of the extent to which advances made under a perfected security interest after the rights of a lien creditor have attached to the collateral will come ahead of the position of the lien creditor. This subsection should be read with Section 9-307(3), which deals with the same problem in the case of an intervening buyer, and Section 9-312(7), which establishes the general rule that future advances made by a secured party have the same priority as the original advance.
  The language in subsection (4) differs from that in the 1972 Official Text. The Official Text states:
    "A person who becomes a lien creditor while the security interest is perfected takes subject to the security interest only to the extent that it secures advances made before he becomes a lien creditor or within forty-five days thereafter or made without knowledge of the lien or pursuant to a commitment entered into without
the knowledge of the lien."
  The change was recommended by both the South Carolina Bar Commercial Law Committee and the Judicial Council. As modified, the subsection is intended to give a secured party lending to a debtor the maximum priority over federal tax liens authorized by the Federal Tax Lien Act.
  The principal provisions of the Federal Tax Lien Act involved are those relating to "commercial transactions financing agreement" [Section 6323(c)(2)], which are secured transactions under which the collateral is inventory or accounts receivable, and "real property construction or improvement financing agreement" [Section 6323(c)(3)(A)], which is a security agreement secured by a contractor's accounts receivable and contract rights.
  In a "commercial transactions financing agreement", future advances made by a secured party after the filing of a federal tax lien
take priority over the tax lien if (1) the advance is made before the forty-five days after the date on which the federal tax lien is filed or the time the secured party has actual knowledge of the tax lien filing, and (2) state law gives the secured party's future advance protection against the rights of a judgment lien creditor as of the time the tax lien is filed. Both the Official Text and the proposed wording approved by the Commercial Law Committee and the Judicial Council meet this second requirement. In spite of the last sentence in the proposed wording relating to the ineffectiveness of knowledge by the secured party, however, a future advance made under a "commercial transactions financing agreement" will be subordinate to a filed federal tax lien if the future advance is made after the secured party has actual knowledge of the filing, or, even in the absence of actual knowledge, if the advance is made more than forty-five days after the filing. This maximum priority is established by the Federal Tax Lien Act, which would supersede any inconsistent state law. Therefore, lenders making future advances in loan agreements secured by accounts receivable or inventory will still have to check for federal tax liens before each advance in order to maintain full priority over any intervening filing.
  With respect to a "real property construction or improvement financing agreement", however, the secured party will, under the proposed language, have absolute priority with respect to future advances over any intervening lien creditor, including federal tax liens, regardless of when the future advance is made and irrespective of the secured party's knowledge of the intervening lien. The reason for the difference is the absence of language in the Federal Tax Lien Act limiting the priority to the forty-five days or actual knowledge test. Under the Official Text version of this
subsection, on the other hand, the secured party would be protected only when the future advance is made without actual knowledge of the filed federal tax lien, if the advance was made more than forty-five days after the filing. Thus the proposed wording in this subsection gives the secured party somewhat greater priority than is authorized under the language in the Official Text.
  7. Act 183 of 1979 amended subsection (2) (Section 36-9-301(2) of the South Carolina Code) by substituting twenty days for ten days. It made a similar amendment in Section 36-9-312(4) of the South Carolina Code. This act follows the Official Text and utilizes ten days as the cut-off point for the super priority given purchase money security interests.
  "Section 36-9-302. When filing is required to perfect security interests; security interests to which filing provisions of this chapter do not apply.
  (1) A financing statement must be filed to perfect all security interests except the following:
    (a) a security interest in collateral in possession of the secured party under Section 36-9-305;
    (b) a security interest temporarily perfected in instruments or documents without delivery under Section 36-9-304 or in proceeds for a ten-day period under Section 36-9-306;
    (c) a security interest created by an assignment of a beneficial interest in a trust or decedent's estate;
    (d) a purchase money security interest in consumer goods; but filing is required for a motor vehicle required to be registered; and fixture filing is required for priority over conflicting interests in fixtures to the extent provided in Section 36-9-313;
    (e) an assignment of accounts which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts of the assignor;
    (f) a security interest of a collecting bank (Section 36-4-208) or arising under the chapter on Sales (Section 36-9-113) or covered in subsection (3) of this section;
    (g) an assignment for the benefit of all the creditors of the transferor, and subsequent transfers by the assignee thereunder.
  (2) If a secured party assigns a perfected security interest, no filing under this chapter is required in order to continue the perfected status of the security interest against creditors of and transferees from the original debtor.
  (3) The filing of a financing statement otherwise required by this chapter is not necessary or effective to perfect a security interest in property subject to:
    (a) a statute or treaty of the United States which provides for a national or international registration or a national or international certificate of title or which specifies a place of filing different from that specified in this chapter for filing the security interest; or
    (b) Chapter 19 of Title 56 (Protection of title to and interests in motor vehicles and Chapter 23 of Title 50 (Filing of watercraft and outboard motors)); but during any period in which collateral is inventory held for sale by a person who is in the business of selling goods of that kind, the filing provisions of this chapter (Part 4) apply to a security interest in that collateral created by him as debtor; or
    (c) a certificate of title statute of another jurisdiction under the law of which indication of a security interest on the certificate is required as a condition of perfection (subsection (2) of Section 36-9-103).
  (4) Compliance with a statute or treaty described in subsection (3) is equivalent to the filing of a financing statement under this chapter, and a security interest in property subject to the statute or treaty can be perfected only by compliance except as provided in Section 36-9-103 on multiple-state transactions. Duration and renewal of perfection of a security interest perfected by compliance with the statute or treaty are governed by the provisions of the statute or treaty; in other respects, the security interest is subject to this chapter."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 5, Uniform Conditional Sales Act; Section 8, Uniform Trust Receipts Act.
  Purposes. 1. Subsection (1) states the general rule that to perfect a security interest under this article a financing statement must be filed. Paragraphs (1)(a) through (1)(g) exempt from the filing requirement the transactions described. Subsection (3) further sets out certain transactions to which the filing provisions of this article do not apply, but it does not defer to another state statute on the filing of inventory security interests. The cases recognized are those where suitable alternative systems for giving public notice of a security interest are available. Subsection (4) states the consequences of such other form of notice.
  Section 9-303 states the time when a security interest is perfected by filing or otherwise. Part 4 of the article deals with the mechanics of filing: place of filing, form of financing statement, and so on.
  2. As at common law, there is no requirement of filing when the secured party has possession of the collateral in a pledge transaction
[paragraph (1)(a)], Section 9-305 should be consulted on what collateral may be pledged and on the requirements of possession.
  3. Under this article, as under the Uniform Trust Receipts Act, filing is not effective to perfect a security interest in instruments. See Section 9-304(1).
  4. Where goods subject to a security interest are left in the debtor's possession, the only permanent exception from the general filing requirement is that stated in paragraph (1)(d): purchase money security interests in consumer goods. For temporary exceptions, see Sections 9-304(5)(a) and 9-306.
  In many jurisdictions under prior law security interests in consumer goods under conditional sale or bailment leases were not subject to filing requirements. Paragraph (1)(d) follows the policy of those jurisdictions. The paragraph changes prior law in jurisdictions where all conditional sales and bailment leases were subject to a filing requirement, except that filing is required for purchase money security interests in consumer fixtures to attain priority under Section 9-313 against real estate interests.
  Although the security interests described in paragraph (1)(d) are perfected without filing, Section 9-307(2) provides that unless a financing statement is filed certain buyers may take free of the security interest even though perfected. See that section and the comment thereto.
  On filing for security interests in motor vehicles under certificate of title laws see subsection (3) of this section.
  5. A financing statement must be filed to perfect a security interest in accounts except for the transactions described in paragraphs (1)(e) and (g). It should be noted that this article applies to sales of accounts and chattel paper as well as to transfers thereof for
security [Section 9-102(1)(b)]; the filing requirement of this section applies both to sales and to transfers thereof for security. In this respect this article follows many of the pre-code statutes regulating assignments of accounts receivable.
  Over forty jurisdictions had enacted accounts receivable statutes. About half of these statutes required filing to protect or perfect assignments; of the remainder, one was a so-called "book-marking" statute and the others validated assignments without filing. This article adopts the filing requirement, on the theory that there is no valid reason why public notice is less appropriate for assignments of accounts than for any other type of nonpossessory interest. Section 9-305, furthermore, excludes accounts from the types of collateral which may be the subject of a possessory security interest: filing is thus the only means of perfection contemplated by this article. See Section 9-306 on accounts as proceeds.
  The purpose of the subsection (1)(e) exemption is to save from ex post facto invalidation casual or isolated assignments: some accounts receivable statutes were so broadly drafted that all assignments, whatever their character or purpose, fell within their filing provisions. Under such statutes many assignments which no one would think of filing might have been subject to invalidation. The paragraph (1)(e) exemption goes to that type of assignment. Any person who regularly takes assignments of any debtor's accounts should file. In this connection Section 9-104(f) which excludes certain transfers of accounts from the article should be consulted.
  Assignments of interests in trusts and estates are not required to be filed because they are often not thought of as collateral comparable to the types dealt with by this article.
Assignments for the benefit of creditors are not required to be filed because they are not financing transactions and the debtor will not ordinarily be engaging in further credit transactions.
  6. With respect to the paragraph (1)(f) exemptions, see the sections cited therein and comments thereto.
  7. The following example will explain the operation of subsection (2): Buyer buys goods from seller who retains a security interest in them which he perfects. Seller assigns the perfected security interest to X. The security interest, in X's hands and without further steps on his part, continues perfected against Buyer's transferees and creditors. If, however, the assignment from Seller to X was itself intended for security (or was a sale of accounts or chattel paper), X must take whatever steps may be required for perfection in order to be protected against Seller's transferees and creditors.
  8. Subsection (3) exempts from the filing provisions of this article transactions as to which an adequate system of filing, state or federal, has been set up outside this article and subsection (4) makes clear that when such a system exists perfection of a relevant security interest can be had only through compliance with that system (i.e., filing under this article is not a permissible alternative).
  Examples of the type of federal statute referred to in paragraph (3)(a) are the provisions of 17 U.S.C. Sections 28, 30 (copyrights), 49 U.S.C. Section 1403 (aircraft), 49 U.S.C. Section 20(c) (Railroads). 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 paragraph (3)(a). An assignee of a claim against the
United States, who must of course comply with the Assignment of Claims Act, must also file under this article in order to perfect his security interest against creditors and transferees of his assignor.
  Some states have enacted central filing statutes with respect to security transactions in kinds of property which are of special importance in the local economy. Subsection (3) adopts such statutes as the appropriate filing system for such property.
  In addition to such central filing statutes many states have enacted certificate of title laws covering motor vehicles and the like. Subsection (3) exempts transactions covered by such laws from the filing requirements of this article.
  For a discussion of the operation of state motor vehicle certificate of title laws in interstate contexts, see Comment 4 to Section 9-103.
  9. Perfection of a security interest under a state or federal statute of the type referred to in subsection (3) has all the consequences of perfection under the provisions of this article, Subsection (4).
  Cross references:
  Point 1: Section 9-303 and Part 4.
  Point 2: Section 9-305.
  Point 3: Section 9-304(1).
  Point 4: Section 9-307(2).
  Point 5: Sections 9-102(1)(b), 9-104(f), and 9-305.
  Point 6: Sections 4-208 and 9-113.
  Definitional cross references:
  "Account": Section 9-106.
  "Collateral": Section 9-105.
  "Consumer goods": Section 9-109.
  "Creditor": Section 1-201.
  "Debtor": Section 9-105.
  "Delivery": Section 1-201.
  "Document": Section 9-105.
  "Equipment": Section 9-109.
  "Fixture": Section 9-313.
  "Fixture filing": Section 9-313.
  "Instrument": Section 9-105.
  "Inventory": Section 9-109.
  "Proceeds": Section 9-306.
  "Purchase": Section 1-201.
  "Purchase money security interest":
Section 9-107.
  "Sale": Sections 2-106 and 9-105.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. The changes made in this section, which set forth the exceptions to the normal rule that perfection of a security interest requires the filing of a financing statement, are for the most part clarifying amendments intended to deal with specific problems that have arisen under the 1962 Text. South Carolina adopted Alternative A of subsection (3)(b) dealing with security interests that must be indicated on certificates of title, and the 1972 Text in effect carries over Alternative A as the exclusive rule. The new wording of subsection (3)(b) will not create any change in the treatment of security interests of titled goods in South Carolina. See the next paragraph with respect to security interests involving railroad companies. In this connection, it is important to note that both under the 1962 Text adopted in South Carolina and the 1972 Text of subsection (3), a security interest in any goods that are exempt from the certificate of title rules (e.g. special mobile equipment-Sections 56-19-220(7) and 56-19-10(32) of the 1976 South Carolina Code) must be perfected by filing a financing statement unless some other exception to the filing requirements is available (e.g. an outboard motor of less than 5 h.p.) (see Section
50-23-10(b) of the 1976 South Carolina Code) purchased for personal, family, or household use which would be exempt from the filing requirements under Section 9-302(1)(d). It is also important to note that the South Carolina certificate of title statutes only govern the issue of whether or not the security interest in the collateral in question has been duly perfected. All other aspects of such transactions are governed by the Article 9 rules. This is implicit in the 1962 Text and is made explicit in subsection (4) of the 1972 Text. See paragraphs 11 and 12 of the South Carolina Reporter's Notes to Section 9(A) of this act, infra. Finally, note that in 1972 the South Carolina General Assembly amended the motor vehicle certificate of title statute to require certificates of title for all mobile homes. See Act 1474 of 1972 which has been incorporated into Sections 59-19-210 and 46-19-220(9) of the 1976 South Carolina Code. Prior to the 1972 amendments, the status of mobile homes was uncertain. As a result of the 1972 Text amendments, the exclusive method of perfecting a security interest on a mobile home is under the South Carolina Certificates of Title Act, Sections 56-19-210 et seq., unless the mobile home falls within one of the exemptions in Section 56-19-220 of the 1976 South Carolina Code.
  NOTE: South Carolina enacted a special addition to the Official Text of Section 9-302(3)(b) as part of the 1966 UCC. The ostensible purpose of this nonuniform language was to authorize central filing in the office of the Secretary of State under Section 30-11-20 of the 1976 South Carolina Code of security interests against railroads property, other than railroad rolling stock which, is subject to national filing requirements under Section 9-302(3)(a). However, under the 1972 Text, these nonrolling stock security interests
against railroads would be subject to a one-time filing in the office of the Secretary of State under Sections 9-401(5) and 9-403(6), which deal with perfection of security interests against transmitting utilities (see 9-105(n) of the 1972 Text). Moreover, the existing filing provisions of Section 30-11-20 require local filing in each county where the railroad has property affected by the security interest in addition to central filing; however, only a one-time central filing is required under the 1972 Text as far as security interests (other than those against railroad rolling stock) covering personalty and fixtures of railroads and other transmitting utilities. Therefore this special language contained in the 1966 UCC version of 9-302(3)(b) is no longer necessary and is consequently not included in this act.
  2. Former paragraph (1)(c), which created a nonfiling rule for purchase money security interests in farm equipment costing less than twenty-five hundred dollars has been eliminated. The effect of the former rule was to make farmers' equipment unavailable to them as collateral for loans from some lenders who were fearful that such equipment might be subject to a valid nonfiled security interest.
  3. A new paragraph (1)(c) exempts from the filing rules security interests created by assignments of beneficial interests in trusts and estates, because these assignments are not ordinarily thought of as subject to this article, and a filing rule might operate to defeat many assignments because creditors would not realize such assignments create security interests in a general intangible (defined in Section 9-106). The exemption, however, only applies to filing; in all other respects such assignments would be subject to the provisions of Article 9 if the effect of the assignment is to create a security interest.
  4. The requirement of filing for purchase money security interests in consumer goods which are fixtures has been made applicable only for priority against real estate interests (Section 9-313). However, an unfiled purchase money security interest in consumer goods would have priority over all nonreal estate interests even though it was determined that the consumer goods qualified as a fixture under state law. This represents a possible change from the 1962 Text, adopted in South Carolina, under which it could be argued that unfiled purchase money security interests in consumer goods that were fixtures were subordinate to both real estate and nonreal estate lien creditors. See also the South Carolina Reporter's Notes to Section 9-313 for further discussion on this issue and the special rules regarding perfected security interests in readily removable replacement of domestic appliances that are fixtures.
  5. A new paragraph (1)(g) has been added exempting from filing assignments for the benefit of creditors because they are not financing transactions. Filing of a financing statement to perfect the priority rights of the assignor's creditors is necessary under the 1962 Text, which is currently effective in South Carolina, since such assignments do not qualify for any of the exceptions for filing Section 9-302.
  6. Finally a minor change has been made in subsection (3)(a) to add treaties to the list of items that qualify for the exemption due to national filing requirements. Examples of the types of federal statutes coming within this exemption are set forth in Official Comment 8 of this section.
  "Section 36-9-303. When security interest is perfected; continuity of perfection.
  (1) A security interest is perfected when it has attached and when all of the applicable
steps required for perfection have been taken. The steps are specified in Sections 36-9-302, 36-9-304, 36-9-305, and 36-9-306. If the steps are taken before the security interest attaches, it is perfected at the time when it attaches.
  (2) If a security interest is originally perfected in any way permitted under this chapter and is subsequently perfected in some other way under this chapter, without an intermediate period when it was unperfected, the security interest is considered to be perfected continuously for the purposes of this chapter."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision:
None.
  Purposes. 1. The term "attach" is used in this article 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 secured party has taken all the steps required by this article as specified in the several sections listed in subsection (1). A perfected security interest may still be or become subordinate to other interests (see Section 9-312) but 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. Subsection (1) states the truism 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. 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
interest is perfected automatically when it attaches.
  2. The following example will illustrate the operation of subsection (2): A bank which has issued a letter of credit honors drafts drawn under the credit and receives possession of the negotiable bill of lading covering the goods shipped. Under Sections 9-304(2) and 9-305 the bank now has a perfected security interest in the document and the goods. The bank releases the bill of lading to the debtor for the purpose of procuring the goods from the carrier and selling them. Under Section 9-304(5) the bank continues to have a perfected security interest in the document and goods for twenty-one days. The bank files before the expiration of the twenty-one day period. Its security interest now continues perfected for as long as the filing is good. The goods are sold by the debtor. The bank continues to have a security interest in the proceeds of the sale to the extent stated in Section 9-306.
  If the successive stages of the bank's security interest succeed each other without an intervening gap, the security interest is "continuously perfected" and the date of perfection is when the interest first became perfected (i.e., in the example given, when the bank received possession of the bill of lading against honor of the drafts). If, however, there is a gap between stages - for example, if the bank does not file until after the expiration of the twenty-one day period specified in Section 9-304(5), the collateral still being 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 twenty-one day period); the bank's interest might now become subject to attack under Section 60 of the Federal Bankruptcy Act and would be subject to any interests arising during the gap
period which under Section 9-301 take priority over an unperfected security interest.
  The rule of subsection (2) would also apply to the case of collateral brought into this state subject to a security interest which became perfected in another state or jurisdiction. See Section 9-103(1)(d).
  Cross references:
  Sections 9-302, 9-304, 9-305, 9-306.
  Point 1: Sections 9-204 and 9-312.
  Point 2: Sections 9-103(1)(d) and 9-301.
  Definitional cross references:
  "Attach": Section 9-203.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
  "Section 36-9-304. Perfection of security interest in instruments, documents, and goods covered by documents; perfection by permissive filing; temporary perfection without filing or transfer of possession.
  (1) A security interest in chattel paper or negotiable documents may be perfected by filing. A security interest in money or instruments (other than instruments which constitute part of chattel paper) can be perfected only by the secured party's taking possession, except as provided in subsections (4) and (5) of this section and subsections (2) and (3) of Section 36-9-306 on proceeds.
  (2) During the period that goods are in the possession of the issuer of a negotiable document for the goods, a security interest in the goods is perfected by perfecting a security interest in the document, and any security interest in the goods otherwise perfected during the period is subject thereto.
  (3) A security interest in goods in the possession of a bailee other than one who has
issued a negotiable document for the goods is perfected by issuance of a document in the name of the secured party or by the bailee's receipt of notification of the secured party's interest or by filing as to the goods.
  (4) A security interest in instruments or negotiable documents is perfected without filing or the taking of possession for a period of twenty-one days from the time it attaches to the extent that it arises for new value given under a written security agreement.
  (5) A security interest remains perfected for a period of twenty-one days without filing where a secured party having a perfected security interest in an instrument, a negotiable document, or goods in possession of a bailee other than one who has issued a negotiable document for the goods:
    (a) makes available to the debtor the goods or documents representing the goods for the purpose of ultimate sale or exchange or for the purpose of loading, unloading, storing, shipping, transshipping, manufacturing, processing, or otherwise dealing with them in a manner preliminary to their sale or exchange, but priority between conflicting security interest in the goods is subject to subsection (3) of Section 36-9-312; or
    (b) delivers the instrument to the debtor for the purpose of ultimate sale or exchange or of presentation, collection, renewal, or registration of transfer.
  (6) After the twenty-one day period in subsections (4) and (5) perfection depends upon compliance with applicable provisions of this chapter."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Sections 3 and 8(1), Uniform Trust Receipts Act.
  Purposes. 1. For most types of property, filing and taking possession are alternative methods of perfection. For some types of intangibles (i.e., accounts and general intangibles) filing is the only available method (see Section 9-305 and point 1 of comment thereto). With respect to instruments subsection (1) provides that, except for the cases of "temporary perfection" covered in subsections (4) and (5), taking possession is the only available method; this provision follows the Uniform Trust Receipts Act. The rule is based on the thought that where the collateral consists of instruments, it is universal practice for the secured party to take possession of them in pledge; any surrender of possession to the debtor is for a short time; therefore it would be unwise to provide the alternative of perfection for a long period by filing which, since it in no way corresponds with commercial practice, would serve no useful purpose.
  For similar reasons, filing is not permitted as to money.
  Subsection (1) further provides that filing is available as a method of perfection for security interests in chattel paper and negotiable documents, which also come within Section 9-305 on perfection by possession. Chattel paper is sometimes delivered to the assignee, sometimes left in the hands of the assignor for collection; subsection (1) allows the assignee to perfect his interest by filing in the latter case. Negotiable documents may be, and usually are, delivered to the secured party; subsection (1) follows the Uniform Trust Receipts Act in allowing filing as an alternative method of perfection. Perfection of an interest in goods
through a nonnegotiable document is covered in subsection (3).
  2. Subsection (2), following prior law and consistently with the provisions of Article 7, takes the position that, so long as a negotiable document covering goods is outstanding, title to the goods is, so to say, locked up in the document and the proper way of dealing with such goods is through the document. Perfection therefore is to be made with respect to the document and, when made, automatically carries over to the goods. Any interest perfected directly in the goods while the document is outstanding (for example, a chattel mortgage type of security interest on goods in a warehouse) is subordinated to an outstanding negotiable document.
  3. Subsection (3) takes a different approach to the problem of goods covered by a nonnegotiable document or otherwise in the possession of a bailee who has not issued a negotiable document. Here title to the goods is not looked on as being locked up in the document and the secured party may perfect his interest directly in the goods by filing as to them. The subsection states 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 which, under Section 9-305, is looked on as equivalent to taking possession by the secured party.
  4. Subsections (4) and (5) follow the Uniform Trust Receipts Act in giving perfected status to security interests in instruments and documents for a short period although there has been no filing and the collateral is in the debtor's possession. The period of twenty-one days is chosen to conform to the provisions of Section 60 of the Federal Bankruptcy Act. There are a
variety of legitimate reasons - some of them are described in subsections (5)(a) and (5)(b) - why such collateral has to be temporarily released to a debtor and no useful purpose would be served by cluttering the files with records of such exceedingly short term transactions. Under subsection (4) the twenty-one day 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 under a written security agreement. Under subsection (5) the twenty-one day perfection runs from the date a secured party who already has a perfected security interest turns over the collateral to the debtor (an example is a bank which has acquired a bill of lading by honoring drafts drawn under a letter of credit and subsequently turns over the bill of lading to its customer); there is no new value requirement but the turnover must be for one or more of the purposes stated in subsections (5)(a) and (5)(b). Note that while subsection (4) is restricted to instruments and negotiable documents, subsection (5) extends to goods covered by nonnegotiable documents as well. Thus the letter of credit bank referred to in the example could make a subsection (5) turnover without regard to the form of the bill of lading, provided that, in the case of a nonnegotiable document, it had previously perfected its interest under one of the methods stated in subsection (3). But note that the discussion of subsection (5) in this comment deals only with perfection. Priority of a security interest in inventory after surrender of the document depends on compliance with the requirements of Section 9-312(3) on notice to prior inventory financer.
  Finally, it should be noted that the twenty-one days applies only to the documents and to the goods obtained by surrender thereof. If the goods are sold, the security interest
will continue in proceeds for only ten days under Section 9-306, unless a further perfection occurs as to the security interest in proceeds.
  Cross references:
  Article 7 and Sections 9-303, 9-305, and 9-312(3).
  Definitional cross references:
  "Chattel paper": Section 9-105.
  "Debtor": Section 9-105.
  "Document": Section 9-105.
  "Goods": Section 9-105.
  "Instrument": Section 9-105.
  "Receives notification": Section 1-201.
  "Sale": Sections 2-106 and 9-105.
  "Secured party": Section 9-105.
  "Security Agreement": Section 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
  "Written": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. The change in subsection (1) corrects an inadvertent omission in the 1962 Text, and makes clear that a security interest in money cannot be perfected by filing. The additional language at the end of subsection (1) makes it clear that perfection of security interests in the proceeds from the sale of instruments or money held as collateral are subject to the rules in Section 9-306.
  2. A provision has been added to subsection (5) making it clear that the twenty-one day period referred to therein deals only with perfection, but that there must be compliance with the notice provisions of Section 9-312(3) in order for the secured party to achieve priority in the underlying goods over earlier inventory financers. Corresponding clarifying changes have been made in Section 9-312(3). See Official Comment 5 for further explanation of the operation of this subsection.
  "Section 36-9-305. When possession by secured party perfects security interest without filing.
  A security interest in letters of credit and advice of credit (subsection (2)(a) of Section 36-5-116), goods, instruments, money, negotiable documents, or chattel paper may be perfected by the secured party's taking possession of the collateral. If the collateral other than goods covered by a negotiable document is held by a bailee, the secured party is considered to have possession from the time the bailee receives notification of the secured party's interest. A security interest is perfected by possession from the time possession is taken without a relation back and continues only so long as possession is retained, unless otherwise specified in this chapter. The security interest may be otherwise perfected as provided in this chapter before or after the period of possession by the secured party."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. As under the common law of pledge, no filing is required by this article to perfect a security interest where the secured party has possession of the collateral. Compare Section 9-302(1)(a). This section permits a security interest to be perfected by transfer of possession only when the collateral is goods, instruments, documents, or chattel paper: that is to say, accounts and general intangibles are excluded. See Section 5-116 for the special case of assignments of letters and advice of credit. A security interest in accounts and general intangibles - property not ordinarily represented by any writing whose delivery operates to transfer the claim - may under this article be perfected only by filing, and this rule would not be affected by the fact that a security agreement or other writing described
the assignment of such collateral as a "pledge". Section 9-302(1)(e) exempts from filing certain assignments of accounts which are out of the ordinary course of financing: such exempted assignments are perfected when they attach under Section 9-303(1); they do not fall within this section.
  2. Possession may be by the secured party himself or by an agent on his behalf; it is of course clear, however, that the debtor or a person controlled by him cannot qualify as such an agent for the secured party. See also the last sentence of Section 9-205. Where the collateral (except for goods covered by a negotiable document) is held by a bailee, the time of perfection of the security interest, under the second sentence of the section, is when the bailee receives notification of the secured party's interest; this rule rejects the common law doctrine that it is necessary for the bailee to attorn to the secured party or acknowledge that he now holds on his behalf.
  3. The third sentence of the section rejects the "equitable pledge" theory of relation back, under which the taking possession was deemed to relate back to the date of the original security agreement. The relation back theory has had little vitality since the 1938 revision of the Federal Bankruptcy Act, which introduced in Section 60a provisions designed to make such interests voidable as preferences in bankruptcy proceedings. This section now brings state law into conformity with the overriding federal policy; where a pledge transaction is contemplated, perfection dates only from the time possession is taken, although a security interest may attach, unperfected, before that under the rules stated in Section 9-204. The only exception to this rule is the short twenty-one day period of perfection provided in Section 9-304(4) and (5) during which a debtor
may have possession of specified collateral in which there is a perfected security interest.
  Cross references:
  Sections 5-116, 9-204, 9-302, 9-303, and 9-304.
  Definitional cross references:
  "Chattel paper": Section 9-105.
  "Collateral": Section 9-105.
  "Documents": Section 9-105.
  "Goods": Section 9-105.
  "Instruments": Section 9-105.
  "Receives notification":
Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The change in this section corresponds to the change in Section 9-304 of the 1972 Text clarifying the special position of security interest in money. See paragraph 1 of the South Carolina Reporter's Notes to 9-304.
  "Section 36-9-306. 'Proceeds'; secured party's rights on disposition of collateral.
  (1) 'Proceeds' includes whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement. Money, checks, deposit accounts, and the like are 'cash proceeds'. All other proceeds are 'noncash proceeds'.
  (2) Except where this chapter otherwise provides, a security interest continues in collateral notwithstanding sale, exchange, or other disposition of the collateral unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.
  (3) The security interest in proceeds is a continuously perfected security interest if the interest in the original collateral was perfected but it ceases to be a perfected security interest and becomes unperfected ten days after receipt of the proceeds by the debtor unless:
    (a) a filed financing statement covers the original collateral and the proceeds are collateral in which a security interest may be perfected by filing in the office or offices where the financing statement has been filed and, if the proceeds are acquired with cash proceeds, the description of collateral in the financing statement indicates the types of property constituting the proceeds; or
    (b) a filed financing statement covers the original collateral and the proceeds are identifiable cash proceeds; or
    (c) the security interest in the proceeds is perfected before the expiration of the ten-day period.
Except as provided in this section, a security interest in proceeds can be perfected only by the methods or under the circumstances permitted in this chapter for original collateral of the same type.
  (4) In the event of insolvency proceedings instituted by or against a debtor, a secured party with a perfected security interest in proceeds has a perfected security interest only in the following proceeds:
    (a) in identifiable noncash proceeds and in separate deposit accounts containing only proceeds;
    (b) in identifiable cash proceeds in the form of money which is neither commingled with other money nor deposited in a deposit account prior to the insolvency proceedings;
    (c) in identifiable cash proceeds in the form of checks and the like which are not
deposited in a deposit account prior to the insolvency proceedings;
    (d) in all cash and deposit accounts of the debtor in which proceeds have been commingled with other funds, but the perfected security interest under this paragraph (d) is:
      (i) subject to any right to set-off;
      (ii) limited to an amount not greater than the amount of any cash proceeds received by the debtor within ten days before the institution of the insolvency proceedings less the sum of (1) the payments to the secured party on account of cash proceeds received by the debtor during the period and (2) the cash proceeds received by the debtor during the period to which the secured party is entitled under paragraphs (a) through (c) of this subsection (4).
  (5) If a sale of goods results in an account or chattel paper which is transferred by the seller to a secured party, and if the goods are returned to or are repossessed by the seller or the secured party, the following rules determine priorities:
    (a) If the goods were collateral at the time of sale, for an indebtedness of the seller which is still unpaid, the original security interest attaches again to the goods and continues as a perfected security interest if it was perfected at the time when the goods were sold. If the security interest was originally perfected by a filing which is still effective, nothing further is required to continue the perfected status; in any other case, the secured party must take possession of the returned or repossessed goods or must file.
    (b) An unpaid transferee of the chattel paper has a security interest in the goods against the transferor. The security interest is prior to a security interest asserted under paragraph (a) to the extent that the transferee
of the chattel paper was entitled to priority under Section 36-9-308.
    (c) An unpaid transferee of the account has a security interest in the goods against the transferor. The security interest is subordinate to a security interest asserted under paragraph (a).
    (d) A security interest of an unpaid transferee asserted under paragraph (b) or (c) must be perfected for protection against creditors of the transferor and purchasers of the returned or repossessed goods."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 10, Uniform Trust Receipts Act.
  Purposes. 1. This section states a secured party's right to the proceeds received by a debtor on disposition of collateral and states when his interest in such proceeds is perfected.
  It makes clear that insurance proceeds from casualty loss of collateral are proceeds within the meaning of this section.
  As to the proceeds of consigned goods, see Section 9-114 and the comment thereto.
  2. (a) Whether a debtor's sale of collateral was authorized or unauthorized, prior law generally gave the secured party a claim to the proceeds. Sometimes it was said that the security interest attached to the "property" received in substitution; sometimes it was said the debtor held the proceeds as "trustee" or "agent" for the secured party. Whatever the formulation of the rule, the secured party, if he could identify the proceeds, could reclaim them or their equivalent from the debtor or his trustee in bankruptcy. This section provides new rules for insolvency proceedings. Paragraphs 4(a) through (c) substitute specific rules of identification for general principles of tracing. Paragraph 4(d) limits the security
interest in proceeds not within these rules to an amount of the debtor's cash and deposit accounts not greater than cash proceeds received within ten days of insolvency proceedings less the cash proceeds during this period already paid over and less the amounts for which the security interest is recognized under paragraphs 4(a) through (c).
  (b) Subsections (2) and (3) make clear that the four-month period for calculating a voidable preference in bankruptcy begins with the date of the secured party's obtaining the security interest in the original collateral and not with the date of his obtaining control of the proceeds. The interest in the proceeds "continues" as a perfected interest if the original interest was perfected; but the interest ceases to be perfected after the expiration of ten days unless a filed financing statement covered the original collateral and the proceeds are collateral of a type as to which a security interest could be perfected by a filing in the same office or unless the secured party perfects his interest in the proceeds themselves - i.e., by filing a financing statement covering them or by taking possession. See Section 9-312(6) and comment thereto for priority of rights in proceeds perfected by a filing as to original collateral.
  (c) Where cash proceeds are covered into the debtor's checking account and paid out in the operation of the debtor's business, recipients of the funds of course take free of any claim which the secured party may have in them as proceeds. What has been said relates to payments and transfers in ordinary course. The law of fraudulent conveyances would no doubt in appropriate cases support recovery of proceeds by a secured party from a transferee out of ordinary course or otherwise in collusion with the debtor to defraud the secured party.
  3. In most cases when a debtor makes an unauthorized disposition of collateral, the security interest, under prior law and under this article, continues in the original collateral in the hands of the purchaser or other transferee. That is to say, since the transferee takes subject to the security interest, the secured party may repossess the collateral from him or in an appropriate case maintain an action for conversion. Subsection (2) codifies this rule. The secured party may claim both proceeds and collateral, but may of course have only one satisfaction.
  In many cases a purchaser or other transferee of collateral will take free of a security interest; in such cases the secured party's only right will be to proceeds. The transferee will take free whenever the disposition was authorized; the authorization may be contained in the security agreement or otherwise given. The right to proceeds, either under the rules of this section or under specific mention thereof in a security agreement or financing statement does not in itself constitute an authorization of sale.
  Section 9-301 states when transferees take free of unperfected security interests. Sections 9-307 on goods, 9-308 on chattel paper and instruments, and 9-309 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.
  4. Subsection (5) states rules to determine priorities when collateral which has been sold is returned to the debtor; for example goods returned to a department store by a dissatisfied customer. The most typical problems involve sale and return of inventory, but the subsection can also apply to equipment. Under the rule of Benedict v. Ratner, failure to segregate such
returned goods sometimes led to invalidation of the entire security arrangement. This article rejects the Benedict v. Ratner line of cases (see Section 9-205 and comment). Subsection (5)(a) of this section reenforces the rule of Section 9-205; as between secured party and debtor (and debtor's trustee in bankruptcy) the original security interest continues on the returned goods. Whether or not the security interest in the returned goods is perfected depends upon factors stated in the text.
  Paragraphs (5)(b), (c), and (d) deal with a different aspect of the returned goods situation. Assume that a dealer has sold an automobile and transferred the chattel paper or the account arising on the sale to Bank X (which had not previously financed the car as inventory). Thereafter the buyer of the automobile rightfully rescinds the sale, say for breach of warranty, and the car is returned to the dealer. Paragraph (5)(b) gives the bank as transferee of the chattel paper or the account a security interest in the car against the dealer. For protection against dealer's creditors or purchasers from him (other than buyers in the ordinary course of business, see Section 9-307), Bank X as the transferee, under paragraph (5)(d), must perfect its interest by taking possession of the car or by filing as to it. Perfection of his original interest in the chattel paper or the account does not automatically carry over to the returned car, as it does under paragraph (5)(a) where the secured party originally financed the dealer's inventory.
  In the situation covered by (5)(b) and (5)(c) a secured party who financed the inventory and a secured party to whom the chattel paper or the account was transferred may both claim the returned goods - the inventory financer under paragraph (5)(a), the transferee under paragraphs (5)(b) and (5)(c). With respect to chattel paper, Section 9-308 regulates the
priorities. With respect to an account, paragraph (5)(c) subordinates the security interest of the transferee of the account to that of the inventory financer. However, if the inventory security interest was unperfected, the transferee's interest could become entitled to priority under the rules stated in Section 9-312(5).
  In cases of repossession by the dealer and also in cases where the chattel was returned to the dealer by the voluntary act of the account debtor, the dealer's position may be that of a mere custodian; he may be an agent for resale, but without any other obligation to the holder of the chattel paper; he may be obligated to repurchase the chattel, the chattel paper, or the account from the secured party or to hold it as collateral for a loan secured by a transfer of the chattel paper or the account.
  If the dealer thereafter sells the chattel to a buyer in ordinary course of business in any of the foregoing cases, the buyer is fully protected under Section 2-403(2) as well as under Section 9-307(1), whichever is technically applicable.
  Cross references:
  Sections 9-307, 9-308, and 9-309.
  Point 3: Sections 1-205 and 9-301.
  Point 4: Sections 2-403(2), 9-205, and 9-312.
  Definitional cross references:
  "Account": Section 9-106.
  "Bank": Section 1-201.
  "Chattel paper": Section 9-105.
  "Check": Sections 3-104 and 9-105.
  "Collateral": Section 9-105.
  "Creditors": Section 1-201.
  "Debtor": Section 9-105.
  "Deposit account": Section 9-105.
  "Goods": Section 9-105.
  "Insolvency proceedings": Section 1-201.
  "Money": Section 1-201.
  "Purchaser": Section 1-201.
  "Sale": Sections 2-106 and 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. Although there are a number of changes made in the wording of this section they are for the most part clarifying changes designed to deal with certain problems that have arisen under the 1962 Text, which was adopted in South Carolina, rather than major substantive changes.
  2. The first sentence of subsection (1) defining the term "proceeds" is rewritten for clarity.
  3. The former second sentence of subsection (1) is omitted consistently with the abandonment of the term "contract right" in Section 9-106.
  4. The new second sentence of subsection (1) is intended to overrule various cases to the effect that proceeds of insurance on collateral are not proceeds of the collateral. These cases were considered by the drafting committee of the 1972 Text to be incorrect interpretations of the intent of the 1962 Text. The "except" clause is intended to say that if the insurance contract specifies the person to whom the insurance is payable, the concept of "proceeds" will not interfere with performance of the contract. Note that under this clause insurance payable to a person other than the secured party or the debtor would not constitute proceeds. Note also that even if insurance payments qualify as proceeds, the secured party might lose its security interest in the insurance unless the security interest in the insurance proceeds is perfected under the rules in subsection (3) of this section. Since most insurance payments are made in the form of drafts, which are instruments (defined in Section 9-105(i) of the 1972 Text), the only way a security interest in such a draft can be obtained is by possession of
the instrument (See Section 9-304(1) and paragraph 6 below). Thus it will still be necessary for secured parties to utilize loss payee clauses to require payment and transmission of insurance proceeds on collateral directly to them in order to be sure of having a perfected security interest in such proceeds.
  5. The changes in the wording of subsection (2) are grammatical and nonsubstantive.
  6. Heretofore an apparent inconsistency and ambiguity has existed between the last sentence of Section 9-203(1)(b) of the 1962 Text, which indicated that a claim to proceeds had to be an express term of a security agreement, and Section 9-306(2), which indicated that a right to proceeds was automatic without reference to a term of a security agreement. This ambiguity has been clarified in favor of an automatic right to proceeds, on the theory that this is the intent of the parties, unless otherwise agreed. This has been accomplished by an amendment in Section 9-203(3) of the 1972 Text eliminating any requirement that proceeds be claimed in the security agreement. Further, there has been eliminated the requirement of claiming proceeds in a financing statement, which had resulted in a checking of a box on each financing statement in order to claim proceeds. Instead, the filed claim to the original collateral is treated as constituting automatically a filing as to proceeds. This has been accomplished by deleting subsection 3(a) of the 1962 Text. Note also that Official Comment 3 of the 1972 Text specifically states that a claim of proceeds is not by itself any authorization of a sale of the collateral, thereby perhaps releasing the security interest in the original collateral upon sale under the rules of Sections 9-307, et seq. Official Comment 3 of the 1962 Text was ambiguous on this point.
  7. Several changes have been made in the wording of subsection (3) dealing with the perfection of a security interest in proceeds. Under the 1962 Text, which as was pointed out above was enacted in South Carolina, it is possible to argue that if a security interest in proceeds is claimed in a properly filed financing statement, then the secured party has a perfected security interest in all types of proceeds and any collateral acquired with those proceeds even if the proceeds or collateral acquired with proceeds were not the type of collateral covered by the language in the financing statement or consisted of a type of collateral that requires perfection by filing in a different filing office from that where the original financing statement was filed (e.g., accounts as proceeds of inventory of a multistate business debtor where the rules of 9-103 would require filing as to accounts in a different state from a filing as to inventory) or perfection by some other means than by filing (e.g., possession, which is the only way a security interest in instruments can be obtained pursuant to Section 9-304(1)). This possible interpretation of the 1962 Text was considered by the drafters of the 1972 Text to be overly broad and misleading to other creditors of the debtor and the changes made in subsection (3) are designed to produce a more logical result. Under the revised rules as well as under the 1962 Text, a secured party automatically has a perfected security interest in all proceeds for ten days if the security interest in the original collateral was properly perfected. However, after ten days the security interest in the proceeds becomes unperfected except as to (1) identifiable cash proceeds [subsection 3(b)]; (2) original noncash proceeds (e.g., trade in goods) where they constitute a type of collateral in which a security interest may be perfected by filing in the office where the
original financing statement has been filed; or (3) the proceeds are collateral acquired with cash proceeds ("second tier" proceeds) and the description in the financing statement designates the type of collateral in question. The net effect is that if the secured party wants a fully perfected security interest in all types of proceeds, he will have to be sure that (1) any filed financing statement is worded broadly enough to cover all possible types of second tier proceeds, (2) that financing statements are filed in additional filing offices where the proceeds are of a type where filing in another office is required and (3) as to any type of proceeds where possession is necessary for perfection (for example instruments) the secured party will have to take steps to ensure that he will have possession within ten days after receipt of the proceeds by the debtor (see the discussion of the question of insurance as proceeds in paragraph 4 above). By careful drafting of financing statements and careful attention to the filing requirements, the secured party can adequately protect his security interest in proceeds. At the same time since the perfection requirements as to proceeds are basically the same as for original collateral of the same type, potential creditors of the debtor will be readily able to determine the scope of the secured party's security interest. In short, the statutory language of subsection (3) of the 1972 Text is more precise and fairer to all parties than the 1962 Text.
  8. The revisions of subsection (4) are for clarification and are based on the California revision of the subsection. They make clear that the claim to cash allowed in insolvency is exclusive of any other claim based on tracing. No significant change in substance is intended. In this connection note that Section 9-104 of the 1972 Text has been revised [see Section 9-104(k) and (l) and 9-105(e) of the 1972 Text]
to indicate that a secured party's security interest in deposit accounts under Section 9-306(4) is covered by Article 9 [an interest in such accounts is totally excluded from the coverage of Article 9 by Section 9-104(k) of the 1962 Text thereby raising a possible conflict between Sections 9-104 and 9-306(4)].
  "Section 36-9-307. Protection of buyers of goods.
  (1) A buyer in ordinary course of business (subsection (9) of Section 36-1-201) other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.
  (2) In the case of consumer goods, a buyer takes free of a security interest even though perfected if he buys without knowledge of the security interest, for value and for his own personal, family, or household purposes unless prior to the purchase the secured party has filed a financing statement covering the goods.
  (3) A buyer other than a buyer in ordinary course of business (subsection (1) of this section) takes subject to a security interest with respect to both prior and future advances if the security interest is perfected or if the buyer has knowledge of the security interest. Knowledge by the secured party of the interest of the buyer does not impair the priority of the security interest with respect to advances thereafter made.
  (4) In the case of a purchase of a motor vehicle made pursuant to the provisions of Section 29-15-10, the buyer takes free of a security interest even though perfected, and the State Department of Highways and Public Transportation shall upon request issue a new title free and clear of prior liens and encumbrances."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 9, Uniform Conditional Sales Act; Section 9(2), Uniform Trust Receipts Act.
  Purposes. 1. This section states when buyers of goods take free of a security interest even though perfected. A buyer who takes free of a perfected security interest of course takes free of an unperfected one. Section 9-301 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 (Sales) states general rules on purchase of goods from a seller with defective or voidable title (Section 2-403).
  2. The definition of "buyer in ordinary course of business" in Section 1-201(9) restricts the application of subsection (1) to buyers (except pawnbrokers) "from a person in the business of selling goods of that kind"; thus the subsection applies, in the terminology of this article, primarily to inventory. Subsection (1) further excludes from its operation buyers of "farm products", defined in Section 9-109(3), from a person engaged in farming operations. The buyer in ordinary course of business is defined as one who buys "in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party". This section provides that such a buyer takes free of a security interest, even though perfected, and although he knows the security interest exists. Reading the two provisions together, it results that the buyer takes free if he merely knows that there is a security interest which covers the goods but takes subject if he knows, in addition, that the sale is in violation of some term in the security agreement not waived by the words or conduct of the secured party.
  The limitations which this section imposes 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 has authorized the sale in the security agreement or otherwise, the buyer takes free without regard to the limitations of this section. Section 9-306 states the right of a secured party to the proceeds of a sale, authorized or unauthorized.
  3. Subsection (2) deals with buyers of "consumer goods" (defined in Section 9-109). Under Section 9-301(1)(d) no filing is required to perfect a purchase money interest in consumer goods subject to this subsection except motor vehicles required to be registered; filing is required to perfect security interests in such goods other than purchase money interests and, for motor vehicles, even in the case of purchase money interests. (The special case of fixtures has added complications that are apart from the point of this discussion.)
  Under subsection (2) a buyer of consumer goods takes free of a security interest even though perfected (a) if he buys without knowledge of the security interest, (b) for value, (c) for his own personal, family, or household purposes, and (d) before a financing statement is filed.
  As to purchase money security interests which are perfected without filing under Section 9-302(1)(d): A secured party may file a financing statement (although filing is not required for perfection). If he does file, all buyers take subject to the security interest. If he does not file, a buyer who meets the qualifications stated in the preceding paragraph takes free of the security interest.
  As to security interests which can be perfected only by filing under Section 9-302: This category includes all non-purchase money interests, and all interests, whether or not purchase money, in motor vehicles, as well as interests which may be and are filed, though
filing was not required for perfection under Section 9-302. (Note that under Section 9-302(3) the filing provisions of this article do not apply when a state has enacted a certificate of title law. Thus where motor vehicles are concerned, in a state having such a certificate of title law, perfection will be under that law.) So long as the security interest remains unperfected, not only the buyers described in subsection (2) but the purchasers described in Section 9-301 will take free of the interest. After a financing statement has been filed or after compliance with the certificate of title law all subsequent buyers, under the rule of subsection (2), are subject to the security interest.
  4. Although a buyer is of course subject to the Code's system of notice from filing or possession, subsection (3) provides that a buyer other than a buyer in ordinary course of business takes subject to a security interest with respect to both prior and future advances if the security interest is perfected or if the buyer has knowledge of the security interest. Of course, a buyer in ordinary course who takes free of the security interest under subsection (1) is not subject to any future advances. Compare Sections 9-301(4) and 9-312(7).
  Note: Official Comment 4 has been modified. See South Carolina Reporter's Note 2.
  Cross references:
  Point 1: Sections 2-403 and 9-301.
  Point 2: Section 9-306.
  Point 3: Sections 9-301 and 9-302.
  Point 4: Sections 9-301(4) and 9-312(7).
  Definitional cross references:
  "Buyer in ordinary course of business":
Section 1-201.
  "Consumer goods": Section 9-109.
  "Goods": Section 9-105.
  "Knows" and "Knowledge": Section 1-201.
  "Person": Section 1-201.
  "Purchase": Section 1-201.
  "Pursuant to commitment":
Section 9-105.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. The change in subsection (2) is a conforming change made necessary by the deletion of Section 9-302(1)(c) of the 1962 Text, which provided in substance that a purchase money security interest in farm equipment having an original purchase price not in excess of twenty-five hundred dollars need not be filed. The omission of that provision in Section 9-302(1) makes any corresponding reference unnecessary in the present section.
  2. Subsection (3) is one of three new provisions clarifying the extent to which future advances under a security agreement may outrank an intervening right. See Sections 9-301(4) and 9-312(7). This section deals with the priority rights of a buyer other than a buyer in the ordinary course of business [see Section 1-201(9)] in collateral subject to a prior security interest where the secured party makes advances under a future advance clause subsequent to the time the buyer purchases the property in question.
  The proposed wording in this subsection differs from the language in the 1972 UCC Official Text. The Official Text states:
    "A buyer other than a buyer in an ordinary course of business (subsection (1) of this section) takes free of the security interest to the extent that it secures future advances made after the secured party acquires knowledge of the purchase or more than forty-five days after the purchase, whichever first occurs, unless made pursuant to a commitment entered into
without knowledge of the purchase and before the expiration of the forty-five day period."
  The proposed wording was approved by the South Carolina Bar Commercial Law Committee and the Judicial Council. The legal difference between the two versions is as follows: Under the Official Text a buyer (other than a buyer in the ordinary course of business) of personal property that is subject to a security interest takes priority over any future advances made by the secured party that are made after the buyer receives knowledge of the purchase or in any event made or committed to be made more than forty-five days after the purchase, whereas under the proposed wording, the secured party continues to have priority with respect to future advances irrespective of the time when the advances are made or the secured party's knowledge of the purchaser's interest.
  The change in the Official Text language is similar to the change recommended by the Commercial Law Committee and the Judicial Council in Section 9-301(4). The complications produced by the interaction of Section 9-301(4) and the Federal Tax Lien Statutes do not exist in this subsection, however.
  3. The Permanent Editorial Board of the UCC considered but rejected a proposal to delete the language in Section 9-307(1) in both the 1962 Text and the 1972 Text under which a security interest in farm products follows the farm products when they are purchased by a buyer in the ordinary course of business from a person engaged in farm operations. Buyers in the ordinary course of business of other types of collateral take free and clear of any security interest created by the seller. Although the special rule for farm products is anomalous, it is one that everyone dealing with farm products is aware of and in the absence of compelling evidence that it has hindered the financing of farm products, the decision of the Permanent
Editorial Board to retain the farm products exemption, a decision which was confirmed by the National Commission on Uniform State Laws and the American Law Institute when they approved the 1972 Text, is followed.
  4. Subsection (4) which requires the Department of Highways and Public Transportation to issue a clean certificate of title when an automobile is purchased at a sale to enforce a storage or repairman's lien under Section 29-15-10 of the 1976 South Carolina Code, is not part of the UCC Official Text. It was enacted as Act 134 of 1977. Technically it should be in Title 56 which deals with motor vehicles rather than in this title.
  "Section 36-9-308. Purchase of chattel paper and instruments.
  A purchaser of chattel paper or an instrument who gives new value and takes possession of it in the ordinary course of his business has priority over a security interest in the chattel paper or instrument:
    (a) which is perfected under Section 36-9-304 (permissive filing and temporary perfection) or under Section 36-9-306 (perfection as to proceeds) if he acts without knowledge that the specific paper or instrument is subject to a security interest; or
    (b) which is claimed merely as proceeds of inventory subject to a security interest (Section 36-9-306), even though he knows that the specific paper or instrument is subject to the security interest."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Sections 9(a) and 10 of Uniform Trust Receipts Act.
  Purposes. 1. Chattel paper is defined (Section 9-105) as "a writing or writings which evidence both a monetary obligation and a
security interest in or a lease of specific goods". Such paper has become an important class of collateral in financing arrangements, which may - as in the automobile and some other fields - follow an earlier financing arrangement covering inventory or which may begin with the chattel paper itself.
  Arrangements where the chattel paper is delivered to the secured party who then makes collections, as well as arrangements where the debtor, whether or not he is left in possession of the paper, makes the collections, are both widely used, and are known respectively as notification (or "direct collection") and nonnotification (or "indirect collection") arrangements. In the automobile field, for example, when a car is sold to a consumer buyer under an installment purchase agreement and the resulting chattel paper is assigned, the assignee usually takes possession, the obligor is notified of the assignment and is directed to make payments to the assignee. In the furniture field, for an example on the other hand, the chattel paper may be left in the dealer's hands or delivered to the assignee; in either case the obligor may not be notified, and payments are made to the dealer-assignor who receives them under a duty to remit to his assignee. The widespread use of both methods of dealing with chattel paper is recognized by the provisions of this article, which permit perfection of a chattel paper security interest either by filing or by taking possession.
  2. Although perfection by filing is permitted as to chattel paper, certain purchasers of chattel paper allowed to remain in the debtor's possession take free of the security interest despite the filing.
  Clause (b) of the section deals with the case where the security interest in the chattel paper is claimed merely as proceeds - i.e., on behalf of an inventory financer who has not by some new
transaction with the debtor acquired a specific interest in the chattel paper. In that case a purchaser, even though he knows of the inventory financer's proceeds interest, takes priority provided he gives new value and takes possession of the paper in the ordinary course of his business. The same basic rule applies in favor of a purchaser of other instruments who claims priority against a proceeds interest therein of which he has knowledge. Thus a purchaser of a negotiable instrument might prevail under clause (b) even though his knowledge of the conflicting proceeds claim precluded his having holder in due course status under Section 9-309.
  3. Clause (a) deals with the case where the nonpossessory security interest in the chattel paper is more than a mere claim to proceeds - i.e., exists in favor of a secured party who has given value against the paper, whether or not he financed the inventory whose sale gave rise to it. In this case the purchaser, to take priority, must not only give new value and take possession in the ordinary course of his business; he must also take without knowledge of the existing security interest. Thus a secured party, who has a specific interest in the chattel paper and not merely a claim to proceeds, and who wishes to leave the paper in the debtor's possession can, because of the knowledge requirement, protect himself against purchasers by stamping or noting on the paper the fact that it has been assigned to him.
  4. It should be noted that under Section 9-304(1) a security interest in an instrument, negotiable or nonnegotiable, cannot be perfected by filing (except where the instrument constitutes part of chattel paper). Thus the only types of perfected nonpossessory security interest that can arise in an instrument are the temporary twenty-one day perfection provided for in Section 9-304(4) and (5) or the ten day perfection in proceeds of Section 9-306. Where
such a perfected interest exists in a nonnegotiable instrument, purchasers will take free if they qualify under clause (a) of the section.
  Cross references:
  Point 1: Sections 9-304(1) and 9-305.
  Point 2: Section 9-306.
  Point 4: Sections 9-304 and 9-306.
  Definitional cross references:
  "Chattel paper": Section 9-105.
  "Instrument": Section 9-105.
  "Inventory": Section 9-109.
  "Knowledge": Section 1-201.
  "Proceeds": Section 9-306.
  "Purchaser": Section 1-201.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The section has been rewritten for clarity. Another purpose of the changes is to make the rules of this section applicable to negotiable instruments. Under the 1962 Text, which was enacted in South Carolina, the holder of a negotiable instrument was under some circumstances in a less protected position against competing claims than the holder of chattel paper. The holder of a negotiable instrument had protection only if he achieved the holder in due course status referred to in Section 9-309, which could not be achieved if the holder had knowledge of a conflicting proceeds claim. In contrast, the holder of chattel paper who met the stated conditions was protected under the second sentence of Section 9-308 of the 1962 Text even if he had knowledge of the conflicting proceeds claim. Under the changes, the holder of a negotiable instrument who may not qualify as holder in due course may nevertheless qualify for the protection of this section.
  "Section 36-9-309. Protection of purchasers of instruments and documents.
  Nothing in this chapter limits the rights of a holder in due course of a negotiable instrument (Section 36-3-302) or a holder to whom a negotiable document of title has been duly negotiated (Section 36-7-501) or a bona fide purchaser of a security (Section 36-8-301), and the holders or purchasers take priority over an earlier security interest even though perfected. Filing under this chapter does not constitute notice of the security interest to the holders or purchasers."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 9(a), Uniform Trust Receipts Act.
  Purposes. 1. Under this article as at common law and under prior statutes the rights of purchasers of negotiable paper, including negotiable documents of title and investment securities, are determined by the rules of holding in due course and the like which are applicable to the type of paper concerned. (Articles 3, 7, and 8) This section, as did Section 9(a) of the Uniform Trust Receipts Act, makes explicit the rule which was implicitly but universally recognized under the earlier statutes.
  2. Under Section 9-304(1) filing is ineffective to perfect a security interest in instruments (including securities) except those instruments which are part of chattel paper, and of course is ineffective to constitute notice to subsequent purchasers. Although filing is permissible as a method of perfection for a security interest in documents, this section follows the policy of the Uniform Trust Receipts Act in providing that the filing does not constitute notice to purchasers.
  Cross references:
  Articles 3, 7, and 8 and Sections 9-304(1) and 9-308.
  Definitional cross references:
  "Bona fide purchaser": Section 8-302.
  "Document of Title": Section 1-201.
  "Duly negotiated": Section 7-501.
  "Holder": Section 1-201.
  "Holder in due course": Sections 3-302 and 9-105.
  "Negotiable instrument": Sections 3-104 and 9-105.
  "Notice": Section 1-201.
  "Purchaser": Section 1-201.
  "Security": Sections 8-102 and 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
  "Section 36-9-310. Priority of certain liens arising by operation of law.
  When a person in the ordinary course of his business furnishes services or materials with respect to goods subject to a security interest, a lien upon goods in the possession of the person given by statute or rule of law for the materials or services takes priority over a perfected security interest unless the lien is statutory and the statute expressly provides otherwise."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 11, Uniform Trust Receipts Act.
  Purposes. 1. To provide that liens securing claims arising from work intended to enhance or preserve the value of the collateral take priority over an earlier security interest even though perfected.
  2. Apart from the Uniform Trust Receipts Act which had a section similar to this one, there was generally no specific statutory rule as to priority between security devices and liens for services or materials. Under chattel mortgage or conditional sales law many decisions made the priority of such liens turn on whether the secured party did or did not have "title". This section changes such rules and makes the lien for services or materials prior in all cases where they are furnished in the ordinary course of the lienor's business and the goods involved are in the lienor's possession. Some of the statutes creating such liens expressly make the lien subordinate to a prior security interest. This section does not repeal such statutory provisions. If the statute creating the lien is silent, even though it has been construed by decision to make the lien subordinate to the security interest, this section provides a rule of interpretation that the lien should take priority over the security interest.
  Cross References: Sections 9-102(2), 9-104(c), and 9-312(1).
  Definitional Cross References: "Goods": Section 9-105. "Person": Section 1-201. "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
  "Section 36-9-311. Alienability of debtor's rights; judicial process.
  The debtor's rights in collateral may be voluntarily or involuntarily transferred (by way of sale, creation of a security interest, attachment, levy, garnishment, or other judicial process) notwithstanding a provision in the security agreement prohibiting any transfer or making the transfer constitute a default."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. To make clear that in all security transactions under this article, the debtor has an interest (whether legal title or an equity) which he can dispose of and which his creditors can reach.
  2. Some jurisdictions have held that when a mortgagee or conditional seller has "title" to the collateral, creditors may not proceed against the mortgagor's or vendee's interest by levy, attachment, or other judicial process. This section changes those rules by providing that in all security interests the debtor's interest in the collateral remains subject to claims of creditors who take appropriate action. It is left to the law of each state to determine the form of "appropriate process".
  3. Where the security interest is in inventory, difficult problems arise with reference to attachment and levy. Assume that a debt of $100,000 is secured by inventory worth twice that amount. If by attachment or levy certain units of the inventory are seized, the determination of the debtor's equity in the units seized is not a simple matter. The section leaves the solution of this problem to the courts. Procedures such as marshaling may be appropriate.
  Cross references:
  Sections 9-301(4), 9-307(3), and 9-312(7).
  Definitional Cross References:
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Rights": Section 1-201.
  "Sale": Sections 2-106 and 9-105.
  "Security agreement": Section 9-105.
  "Security interests": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
"Section 36-9-312. Priorities among conflicting security interests in the same collateral.
  (1) The rules of priority stated in other sections of this part and in the following sections shall govern when applicable: Section 36-4-208 with respect to the security interests of collecting banks in items being collected, accompanying documents and proceeds; Section 36-9-103 on security interests related to other jurisdictions; Section 36-9-114 on consignments.
  (2) A perfected security interest in crops for new value given to enable the debtor to produce the crops during the production season and given not more than three months before the crops become growing crops by planting or otherwise takes priority over an earlier perfected security interest to the extent that the earlier interest secures obligations due more than six months before the crops become growing crops by planting or otherwise, even though the person giving new value had knowledge of the earlier security interest.
  (3) A perfected purchase money security interest in inventory has priority over a conflicting security interest in the same inventory and also has priority in identifiable cash proceeds received on or before the delivery of the inventory to a buyer if:
    (a) the purchase money security interest is perfected at the time the debtor receives possession of the inventory;
    (b) the purchase money secured party gives notification in writing to the holder of the conflicting security interest if the holder had filed a financing statement covering the same types of inventory (i) before the date of the filing made by the purchase money secured party, or (ii) before the beginning of the
twenty-one day period where the purchase money security interest is temporarily perfected without filing or possession (subsection (5) of Section 36-9-304);
    (c) the holder of the conflicting security interest receives the notification within five years before the debtor receives possession of the inventory;
    (d) the notification states that the person giving the notice has or expects to acquire a purchase money security interest in inventory of the debtor, describing the inventory by item or type.
  (4) A purchase money security interest in collateral other than inventory has priority over a conflicting security interest in the same collateral or its proceeds if the purchase money security interest is perfected at the time the debtor receives possession of the collateral or within ten days thereafter.
  (5) In all cases not governed by other rules stated in this section (including cases of purchase money security interests which do not qualify for the special priorities set forth in subsections (3) and (4) of this section), priority between conflicting security interests in the same collateral must be determined according to the following rules:
    (a) Conflicting security interests rank according to priority in time of filing or perfection. Priority dates from the time a filing is first made covering the collateral or the time the security interest is first perfected, whichever is earlier, provided that there is no period thereafter when there is neither filing nor perfection.
    (b) So long as conflicting security interests are unperfected, the first to attach has priority.
  (6) For the purposes of subsection (5) a date of filing or perfection as to collateral is also a date of filing or perfection as to proceeds.
  (7) If future advances are made while a security interest is perfected by filing or the taking of possession, the security interest has the same priority for the purposes of subsection (5) with respect to the future advances as it does with respect to the first advance. If a commitment is made before or while the security interest is perfected, the security interest has the same priority with respect to advances made pursuant thereto. In other cases a perfected security interest has priority from the date the advance is made."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. In a variety of situations two or more people may claim an interest in the same property. The several sections specified in subsection (1) contain rules for determining priorities between security interests and such other claims in the situations covered in those sections. For cases not covered in those sections this section states general rules of priority between conflicting security interests.
  2. Subsection (2) gives priority to a new value security interest in crops based on a current crop production loan over an earlier security interest in the crop which secured obligations (such as rent, interest, or mortgage principal amortization) due more than six months before the crops become growing crops. This priority is not affected by the fact that the person making the crop loan knew of the earlier security interest.
  3. Subsections (3) and (4) give priority to a purchase money security interest (defined in Section 9-107) under certain conditions over nonpurchase money interests, which in this context will usually be interests asserted under after-acquired property clauses. See Section 9-204 on the extent to which after-acquired
property interests are validated and Section 9-108 on when a security interest in after-acquired property is deemed taken for new value.
  Prior law, under one or another theory, usually contrived to protect purchase money interests over after-acquired property interests (to the extent to which the after-acquired property interest was recognized at all). For example, in the field of industrial equipment financing it was possible, by manipulation of title theory, for the purchase money financer of new equipment (under conditional sale or equipment trust) to protect himself against the claims of prior mortgagees or bondholders under an after-acquired clause in the mortgage or trust indenture: the result was arrived at on the theory that since "title" to the equipment was never in the vendee or lessee there was nothing for the lien of the mortgage to attach to. While this article broadly validates the after-acquired property interest, it also recognizes as sound the preference which prior law gave to the purchase money interest. That policy is carried out in subsections (3) and (4).
  Subsection (4) states a general rule applicable to all types of collateral except inventory: the purchase money interest takes priority if it is perfected when the debtor receives possession of the collateral or within ten days thereafter. As to the ten-day grace period, compare Section 9-301(2). The perfection requirement means that the purchase money secured party either has filed a financing statement before that time or has a temporarily perfected interest in goods covered by documents under Section 9-304(4) and (5) (which is continued in a perfected status by filing before the expiration of the twenty-one day period specified in that section). There is no requirement that the purchase money secured party be without notice or knowledge of the
other interest; he takes priority although he knows of it or it has been filed.
  Under subsection (3) the same rule of priority, but without the ten-day grace period for filing, applies to a purchase money security interest in inventory, with the additional requirement that the purchase money secured party give notification, as stated in subsection (3), to any other secured party who filed earlier for the same item or type of inventory. The reason for the additional requirement of notification is that typically the arrangement between an inventory secured party and his debtor will require 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 he has already given a security interest in the inventory to another secured party. The notification requirement protects the inventory financer in such a situation: if he has received notification, he will presumably not make an advance; if he has not received notification (or if the other interest does not qualify as a purchase money interest), any advance he may make will have priority. Since an arrangement for periodic advances against incoming property is unusual outside the inventory field, no notification requirement is included in subsection (4).
  Where the purchase money inventory financing began by possession of a negotiable document of title by the secured party, he must in order to retain priority give the notice required by subsection (3) at or before the usual time, i.e., when the debtor gets possession of the inventory, even though his security interest remains perfected for twenty-one days under Section 9-304(5).
  When under these rules 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. Under subsection (4) which deals with noninventory collateral and where there was no ordinary expectation that the goods would be sold, the section gives an affirmative answer. In the case of inventory collateral under subsection (3), where it was expected that the goods would be sold and where financing frequently is based on the resulting accounts, chattel paper, or other proceeds, the subsection gives an answer limited to the preservation of the purchase money priority only insofar as the proceeds are cash received on or before the delivery of the inventory to a buyer, that is, without the creation of an intervening account to which conflicting rights might attach. The conflicting rights to proceeds consisting of accounts are governed by subsection (5). See Comment 8.
  The foregoing rules applicable to purchase money security interests in inventory apply also to the rights in consigned merchandise. See Section 9-114.
  4. Subsection (5) states a rule for determining priority between conflicting security interests in cases not covered in the sections referred to in subsection (1) or in subsections (2), (3), and (4) of this section. Note that subsection (5) applies to cases of purchase money security interests which do not qualify for the special priorities set forth in subsections (3) and (4).
  There is a single priority rule based on precedence in the time as of which the competing parties either filed their security interests or perfected their security interests. 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 so long as there is no intervening period without filing or perfection. Filing may
occur as to particular collateral before the collateral comes into existence. Under the standards of Section 9-203 perfection cannot occur as to particular collateral until the collateral itself (and not prior collateral) comes into existence and the debtor has rights therein; but under subsection (6) of this section the secured party's priority may date from his time of perfection as to the prior collateral, if perfection or filing has been continuously maintained. Subsection (6) provides that a date of filing or perfection as to original collateral is also a date of filing or perfection as to proceeds. This rule should also be read with Section 9-306, which makes it unnecessary to claim proceeds expressly in a financing statement and provides in effect that a filing as to original collateral is also a filing as to proceeds (with exceptions therein stated). Thus, if a financing statement is filed covering inventory, then (subject to the exception involving multistate problems) this filing is also a filing as to the resulting accounts and constitutes the date of filing as to the accounts.
  The party who may have had a prior security interest in inventory or may have had the only such security interest does not automatically for that reason have priority as to the accounts. His claim to accounts may or may not have priority over competing filed claims to accounts. The priority is based on precedence as to the accounts under the rules stated in the preceding paragraph.
  5. The operation of this section is illustrated by the examples set forth under this and the succeeding points.
  Example 1. A files against X (debtor) on February 1. B files against X on March 1. B makes a nonpurchase money advance against certain collateral on April 1. A makes an advance against the same collateral on May 1. A
has priority even though B's advance was made earlier and was perfected when made. It makes no difference whether or not A knew of B's interest when he made his advance.
  The problem stated in the example is peculiar to a notice filing system under which filing may be made before the security interest attaches (see Section 9-402). The Uniform Trust Receipts Act, which first introduced such a filing system, contained no hint of a solution and case law under it was unpredictable. This article follows several of the accounts receivable statutes in determining priority by order of filing. The justification for the rule lies in the necessity of protecting the filing system - that is, of allowing the secured party who has first filed to make subsequent advances without each time having, as a condition of protection, to check for filings later than his. Note, however, that his protection is not absolute: if, in the example, B's advance creates a purchase money security interest, he has priority under subsection (4), or, in the case of inventory, under subsection (3) provided he has properly notified A. (See further Example 3 below.)
  Example 2. A and B make nonpurchase money advances against the same collateral. The collateral is in the debtor's possession and neither interest is perfected when the second advance is made. Whichever secured party first perfects his interest (by taking possession of the collateral or by filing) takes priority and it makes no difference whether or not he knows of the other interest at the time he perfects his own.
  This result may be regarded as an adoption, in this type of situation, of the idea, deeply rooted at common law, of a race of diligence among creditors. Subsection (5)(b) adds the thought that so long as neither of the interests is perfected, the one which first attached
(i.e., under the advance first made) has priority. The last mentioned rule may be thought to be of merely theoretical interest, since it is hard to imagine a situation where the case would come into litigation without either A or B having perfected his interest. If neither interest had been perfected at the time of the filing of a petition in bankruptcy, of course neither would be good against the trustee in bankruptcy.
  Example 3. A has a temporarily perfected (twenty-one day) security interest, unfiled, in a negotiable document in the debtor's possession under Section 9-304(4) or (5). On the fifth day B files and thus perfects a security interest in the same document. On the tenth day A files. A has priority, whether or not he knows of B's interest when he files, because he perfected first and has maintained continuous perfection or filing.
  6. 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 X under a security agreement which covers "all the machinery in X's plant" and contains an after-acquired property clause. A promptly files his financing statement. On March 1 X acquires a new machine, B makes an advance against it and files his financing statement. On April 1 A, under the original security agreement, makes an advance against the machine acquired March 1. If B's advance creates a purchase money security interest, he has priority under subsection (4) (provided he filed before X received possession of the machine or within ten days thereafter). If B's advance, although he gave new value, did not create a purchase money interest, A has priority as to
both of his advances by virtue of his priority in filing, although the parties perfected simultaneously on March 1 as to the new machine.
  The application of the priority rules to proceeds presents special features discussed in Comment 8.
  7. The application of the priority rules to future advances is complicated. In general, since any secured party must operate in reference to the code's system of notice, he takes subject to future advances under a priority security interest while it is perfected through filing or possession, whether the advances are committed or noncommitted, and to any advances subsequently made "pursuant to commitment" (Section 9-105) during that period. In the rare case when a future advance is made without commitment while the security interest is perfected temporarily without either filing or possession, the future advance has priority from the date it is made. These rules are more liberal toward the priority of future advances than the corresponding rules applicable to an intervening buyer [Section 9-307(3)] because of the different characteristics of the intervening party. Compare the corresponding rule applicable to an intervening judgment creditor. [Section 9-301(4)].
  Example 5. On February 1 A makes an advance against machinery in the debtor's possession and files his financing statement. On March 1 B makes an advance against the same machinery and files his financing statement. On April 1 A makes a further advance, under the original security agreement, against the same machinery (which is covered by the original financing statement and thus perfected when made). A has priority over B both as to the February 1 and as to the April 1 advance and it makes no difference whether or not A knows of B's intervening advance when he makes his second advance.
  A wins, as to the April 1 advance, because he first filed even though B's interest attached, and indeed was perfected, before the April 1 advance. The same rule would apply if either A or B had perfected through possession. Section 9-204(3) and the comment thereto should be consulted for the validation of future advances.
  The same result would be reached even though A's April 1 advance was not under the original security agreement, but was under a new security agreement under A's same financing statement or during the continuation of A's possession.
  8. The application of the priority rules of subsections (5) and (6) to proceeds is shown by the following examples:
  Example 6. A files a financing statement covering a described type of inventory then owned or thereafter acquired. B subsequently takes a purchase money security interest in certain inventory described in A's financing statement and achieves priority over A under subsection (3) as to this inventory. This inventory is then sold, producing proceeds.
  If the proceeds of the inventory are instruments or chattel paper, the rights of A and B on the one hand and any adverse claimant to these proceeds on the other are governed by Sections 9-308 and 9-309. If the proceeds are cash, subsection (3) indicates that B's priority as to the inventory carries over to the cash. Proceeds which are accounts constitute different collateral and the priorities as to the original collateral do not control the priority as to the accounts. Under Sections 9-306 and 9-312(6), A's first filing as to the inventory constitutes a first filing as to the accounts, provided that the same filing office would be appropriate for filing as to accounts under the rules of Section 9-306(3). Therefore, A has priority as to the accounts.
  Many parties financing inventory are quite content to protect their first security interest
in the inventory itself, realizing that when inventory is sold, someone else will be financing the accounts and the priority for inventory will not run forward to the accounts. Indeed, the cash supplied by the accounts financer 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 accounts financing by another be devoted to paying off the first inventory security interest.
  Example 7. In the foregoing case, if B had filed directly as to accounts, the date of that filing as to accounts would be compared with the date of A's first filing as to the inventory, and the first-to-file rule would prevail.
  Subsection (6) provides that a filing as to original collateral determines the date of a filing as to the proceeds thereof. This rule implies, of course, that the filing as to the original collateral is effective as to proceeds under the rule of Section 9-306(3).
  Example 8. If C had filed as to accounts in Example 6 above before either A or B had filed as to inventory, C's first filing as to accounts would have priority over the filings of A and B, which would also constitute filings as to accounts under the rule just mentioned. A's and B's position as to the inventory gives them no automatic claim to the proceeds of the inventory consisting of accounts against someone who has filed earlier as to accounts. If, on the other hand, either A's or B's filings as to the inventory constituted good filings as to accounts and these filings preceded C's direct filings as to accounts, A or B would outrank C as to the accounts.
  If the filings as to inventory were not effective under subsection (6) for filing as to accounts because a filing for accounts would have to be in a different filing office under
Section 9-103(3), these inventory filings would nevertheless be effective for ten days as to accounts. If the perfection of the security interest in accounts was continued within the ten days by appropriate filings, then A's and B's interests in the accounts would date from the date of filing as to inventory.
  Cross references:
  Sections 9-204(1) and (9-303).
  Point 1: Sections 4-208, 9-114, 9-301, 9-304, 9-306, 9-307, 9-308, 9-309, 9-310, 9-313, 9-314, 9-315, and 9-316.
  Point 3: Sections 9-108, 9-204, 9-304(4) and (5).
  Points 4 to 7: Sections 9-204, 9-301(4), 9-304(4) and (5), 9-306, 9-307(3), and 9-402(1).
  Point 8: Sections 9-103(6) and 9-306(3).
  Definitional cross references:
  "Chattel paper": Section 9-105.
  "Collateral": Section 9-105.
  "Collecting bank": Section 4-105.
  "Debtor": Section 9-105.
  "Documents": Section 9-105.
  "Give notice": Section 1-201.
  "Goods": Section 9-105.
  "Instruments": Section 9-105.
  "Inventory": Section 9-109.
  "Knowledge": Section 1-201.
  "Person": Section 1-201.
  "Proceeds": Section 9-306.
  "Purchase money security interest":
Section 9-107.
  "Pursuant to commitment":
Section 9-105.
  "Receives notification":
Section 1-201.
  "Secured party": Section 9-105.
  "Security": Sections 8-102 and 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. This section has been substantially rewritten. For the most part the changes are intended to clarify problem areas that have arisen under the wording of the 1962 Text of this section, which was enacted in South Carolina. On the whole, the priority rules in the 1972 Text are more specific and detailed than the equivalent 1962 Text rules. The changes are summarized below.
  2. The change in subsection (1) is primarily a simplification of the equivalent statement in the 1962 Text which lists all the sections of the UCC which contain priority rules.
  3. Several changes have been made in subsection (3) dealing with purchase money security interests in inventory to answer unresolved questions under the 1962 Text.
  (a) One change answers the question how often a notice must be given under that subsection. The 1962 Text does not speak to this issue. In the 1972 Text the designated notice need only be given one time during a five-year period (the analogy is the duration of a financing statement). Once the required notice is given, the priority of the purchase money inventory financer is protected as to all purchase money advances and shipments of inventory made to the debtor within five years of the notice.
  (b) The 1962 Text requires notice to any other secured party of the debtor known by the purchase money secured party, even if one or more of these other security interests are unperfected. Under the 1972 Text notice need only be given to those secured parties who have filed financing statements in the same types of inventory. This change corresponds with the elimination of the effect of knowledge in Section 9-301. See the South Carolina Reporter's Notes to Section 9-301. This change also eliminates the possibility that failure to
notify an unperfected secured party would vitiate the effects of proper notice to all other secured parties with conflicting perfected security interests.
  (c) Another change answers the question of the priority status of the security interests in inventory temporarily perfected for twenty-one days without filing or perfection in a situation which begins with release of a pledged document under Section 9-304(5). The status of the security interest in the underlying goods is unclear under the 1962 Text. The answer provided in the 1972 Text is the usual rule that to preserve his priority resulting from the document the purchase money claimant must give the required notice before the debtor receives possession of the inventory. If the secured party fails to give timely notice, he loses his priority under this subsection. For example, the secured party would not be able to claim the benefits of subsection (3) if he sent the required notice within twenty-one days of the time the documents were out of his possession if the notice was received after the debtor received the goods in question. To avoid this possibility, the required notice should be sent before the documents are released.
  (d) A related issue involves priority claims of consignors against creditors of the consignee claiming security interests in the consigned goods. If the consignment is in reality a security interest [see Section 1-201(37)] then the rules of this section would determine the priorities of the competing creditors of the consigned goods. If, however, the agreement creates a true consignment, then Section 9-114 of the 1972 Text provides that the consignor can obtain priority over the creditors of the consignee by sending notices which comply with the essential requirements set out in this subsection. The type of notice that had to be sent in this circumstance under the 1962 Text
was uncertain. See the South Carolina Reporter's Notes to Section 9-114. See also the South Carolina Reporter's Notes to 9-408 of the 1972 Text for an explanation of the peculiar filing requirements resulting from the South Carolina Bailment Statute (Section 27-23-80 of the 1976 South Carolina Code).
  (e) One of the most widely discussed questions under the 1962 Text was the question of the priority of a person claiming accounts by direct filing with respect thereto. One issue was whether the special position of an inventory financer as a purchase money financer or as the first financer in the business cycle of the debtor gave him any special position as to accounts resulting from the inventory. In general, the 1972 Text gives a negative answer, and a prior right to inventory does not confer a prior right to any proceeds except identifiable cash proceeds (cash and checks) received on or before the delivery of the inventory (i.e., without the intervention of an account). See Example 6 in Official Comment 7 of the 1972 Text. Other aspects of this issue are discussed in paragraph 6 below.
  4. A different answer on the proceeds issue has been given in revised subsection (4) relating to purchase money security interest in collateral other than inventory. Here, where it is not ordinarily expected that the collateral will be sold and that proceeds will result, it seems appropriate to give the party having a purchase money security interest in the original collateral an equivalent priority in its proceeds. The 1962 Text was unclear on this point.
  Act 183 of 1979 substitutes twenty days for ten days in subsection (4). This is a nonuniform amendment. As revised, this section incorporates the Official Text ten-day benchmark. See also Note 7 of the Reporter's Notes to Section 9-301.
  5. Subsection (5) of the 1962 Text contains two principal rules. Paragraph (a) is a first-to-file rule where both competing security interests are perfected by filing. Paragraph (b) is a first-to-perfect rule when either of the security interest is or both of them are perfected otherwise than by filing. A traffic rule is provided by existing subsection (6) to the effect that a continuously perfected security interest shall be treated for the purpose of the foregoing rules as if at all times perfected in the manner it was first perfected. The problems raised have been the subject of an enormous amount of legal literature. They are complicated by the unforeseeable effect of the temporary perfection of security interest in proceeds without filing under Section 9-306, and by speculation as to whether a secured party could claim that his security interest was originally perfected without filing under this rule even though the security interest in proceeds was claimed in his filing as to the original collateral. They are further complicated by the question whether different rules would apply when a financing statement was drawn to cover, for example, inventory and its proceeds (which would include accounts) and when it was drawn to cover inventory and accounts.
  To settle these questions the 1972 Text replaces existing paragraphs (a) and (b) of subsection (5) with a single rule, subsection (5), and eliminates existing subsection (6). In this connection it should be noted that a filing as to proceeds automatically arises from a filed security interest in original collateral under the proposed revision of Section 9-306(3), subject to limitations therein discussed. New proposed subsection (6) makes it clear that subject to these limitations the time of filing or perfection as to original collateral is the time of filing or perfection as to proceeds.
  The rule of subsection (5)(a) of the 1972 Text ranks conflicting perfected security interests by their priority in time, dating back to the respective times when without interruption the security interests were either perfected or were the subjects of appropriate filings. Finally, subsection (5)(b) of the 1972 Text provides a first-to-attach rule where neither security interest is perfected, a situation which will rarely occur. This is the same rule that exists under subsection (5)(c) of the 1962 Text.
  6. Perhaps the most debated subject under Article 9 has been the question whether between conflicting security interests a priority as to original collateral confers a priority as to proceeds. As indicated in paragraph 4 above in the case of collateral other than inventory, e.g., equipment, it seems clear that the policy favoring the purchase money secured party in Section 9-312(4) should give him the first claim to the proceeds. This is so even though the security interests will have been perfected simultaneously when the proceeds arise and the debtor acquires rights therein.
  Proper policy is much less clear when the collateral involved is inventory and proceeds consisting of accounts. (Policy as to other types of receivables as proceeds is expressed in Sections 9-308 and 9-309). Accounts financing is considered more important in the economy than the kinds of inventory that produce accounts, and the desirable rule is one which makes accounts financing certain as to its legal position. Therefore, the rule provided is that where a financing statement as to accounts is filed first (with or without related inventory financing), the security interest in accounts has priority over any subsequent claim to accounts as proceeds of a security interest in inventory filed later. There is therefore no provision in Section 9-312(3) carrying forward to accounts any priority right in inventory, and
subsections (5) and (6) of the 1972 Text adhere firmly to the principle that a date of filing as to original collateral also defines the date of filing as to proceeds. Correspondingly, a financing statement as to inventory (carrying with it a claim to proceeds) which is filed first will under the same provisions have priority over a later filed security interest in accounts, pursuant to subsections (5)(a) and (b) since it would be a prior filing as to accounts. See Examples 6-8 in Official Comment 7 of the 1972 Text. The results are much more certain than under the 1962 Text and once the rules are understood creditors can make rational decisions on whether or not to lend to the debtor. For example, if a potential accounts receivable financer discovers a prior filed financing statement covering inventory, the financer will probably not want to lend money to the debtor on the basis of the debtor's accounts receivable unless the inventory financer agrees to release or subordinate its interest in the accounts as proceeds of the inventory, since the inventory financer's security interest in the "accounts" was filed first and would have priority over any security interest in the same accounts by the accounts receivable financer.
  7. The priority of future advances against an intervening party has been the subject of much discussion and disagreement. Where both interests are filed security interests, the first-to-file rule of present Section 9-312(5)(a) or the corresponding rule in subsection (5)(a) of the 1972 Text is clearly applicable. Under the 1962 Text the position of an intervening pledgee in reference to a subsequent advance by an earlier filed secured party is debatable. The unified priority rule of subsection 9-312(5) in the 1972 Text indicates that subsequent advances by the first filed party have priority, and subsequent advances under a security interest perfected by
possession likewise have priority over an intervening filed security interest. These priority rules are expressly stated in subsection (7). The last sentence of subsection (7) also deals with the rare case of the priority position of a subsequent advance made by a secured party whose security interest is temporarily perfected without either filing or possession, against an intervening secured party. Since there is no notice by the usual methods of filing or possession of the existence of the security interest, the subsequent advances rank only from the actual date of making unless made pursuant to commitment. (See Section 9-105(k) of the 1972 Text).
  One additional related problem that has resulted in controversy under the 1962 Text is the priority status of a secured party that makes an advance to a debtor under an existing or new security agreement when the original loan has been paid off but the original financing statement filed by the secured party is still effective. A few courts (see e.g., Coin-O-Matic Service v. Rhode Island Hospital Trust Co., 3 UCC Rep. 1112 (Super., Ct. R.I. 1966)) have held that a subsequent secured party, who obtains a perfected security interest after the original balance is paid off and before the new advance by the original secured party, takes priority over the original secured party. These cases are incorrect and the Article 9 Review Committee makes a point of specifically disapproving of them in the General Comments attached to its Final Report. See Permanent Editorial Board For The UCC-Review Committee for Article 9 of the UCC-Final Report, 226-27 (1971). However, the Review Committee felt that the result was sufficiently clear under Section 9-312(5) that no new language to achieve the appropriate result was necessary. Instead the situation is dealt with in new Official Comment 7 of the 1972 Text which makes
it clear that the first secured party in the example given above will have priority over the second secured party whether the subsequent advance was made pursuant to a future advance clause in the original security agreement or under an entirely new security agreement. This is consistent with the basic notice filing philosophy of the UCC which is considerably strengthened by the provisions of the 1972 Text. The second secured party in the above example is on notice that there is a potential valid security interest against the collateral in question and he can obtain a release or a subordination agreement from the first secured party if he wishes to obtain priority over him in this situation. In this connection, it is interesting to note that the South Carolina Supreme Court has recently held that a new loan under an open-end real estate mortgage made pursuant to Section 29-3-50 of the 1976 South Carolina Code of Laws has priority over a second mortgage loan made after the balance on the first mortgage was paid off but the first mortgage was not cancelled of record. Central Production Credit Assoc. v Page, 268 S.C., 1, 231
S.E. 2d 210 (1977).
  Different but related problems with future advances discussed above concern the status of future advances made by a secured party (1) after a third party creditor has obtained a judgment lien against the collateral and (2) after the collateral has been sold to a buyer who takes subject to the original security interest. The first situation is dealt with in Section 9-301(4) and the second in Section 9-307(3) of the 1972 Text. See the South Carolina Reporter's Notes to these sections for further explanation. The status of such advances under the 1962 Text is unclear.
  "Section 36-9-313. Priority of security interests in fixtures.
  (1) In this section and in the provisions of Part 4 of this chapter referring to fixture filing, unless the context otherwise requires:
    (a) goods are 'fixtures' when they become so related to particular real estate that an interest in them arises under real estate law;
    (b) a 'fixture filing' is the filing in the office where a mortgage on the real estate would be filed or recorded of a financing statement covering goods which are or are to become fixtures and conforming to the requirements of subsection (5) of Section 36-9-402;
    (c) a mortgage is a 'construction mortgage' to the extent that it secures an obligation incurred for the construction of an improvement on land including the acquisition cost of the land, if the recorded writing so indicates.
  (2) A security interest under this chapter may be created in goods which are fixtures or may continue in goods which become fixtures, but no security interest exists under this chapter in ordinary building materials incorporated into an improvement on land.
  (3) This chapter does not prevent creation of an encumbrance upon fixtures pursuant to real estate law.
  (4) A perfected security interest in fixtures has priority over the conflicting interest of an encumbrancer or owner of the real estate where:
    (a) the security interest is a purchase money security interest, the interest of the encumbrancer or owner arises before the goods become fixtures, the security interest is perfected by a fixture filing before the goods become fixtures or within ten days thereafter, and the debtor has an interest of record in the real estate or is in possession of the real estate; or
    (b) the security interest is perfected by a fixture filing before the interest of the
encumbrancer or owner is of record, the security interest has priority over any conflicting interest of a predecessor in title of the encumbrancer or owner, and the debtor has an interest of record in the real estate or is in possession of the real estate; or
    (c) the fixtures are readily removable factory or office machines or readily removable replacements of domestic appliances which are consumer goods, and before the goods become fixtures the security interest is perfected by any method permitted by this chapter; or
    (d) the conflicting interest is a lien on the real estate obtained by legal or equitable proceedings after the security interest was perfected by any method permitted by this chapter.
  (5) A security interest in fixtures, whether or not perfected, has priority over the conflicting interest of an encumbrancer or owner of the real estate where:
    (a) the encumbrancer or owner has consented in writing to the security interest or has disclaimed an interest in the goods as fixtures; or
    (b) the debtor has a right to remove the goods as against the encumbrancer or owner. If the debtor's right terminates, the priority of the security interest continues for a reasonable time.
  (6) Notwithstanding paragraph (a) of subsection (4) but otherwise subject to subsections (4) and (5), a security interest in fixtures is subordinate to a construction mortgage recorded before the goods become fixtures if the goods become fixtures before the completion of the construction. To the extent that it is given to refinance a construction mortgage, a mortgage has this priority to the same extent as the construction mortgage.
  (7) In cases not within the preceding subsections, a security interest in fixtures is
subordinate to the conflicting interest of an encumbrancer or owner of the related real estate who is not the debtor.
  (8) When the secured party has priority over all owners and encumbrancers of the real estate, he may, on default, subject to the provisions of Part 5, remove his collateral from the real estate but he must reimburse any encumbrancer or owner of the real estate who is not the debtor and who has not otherwise agreed for the cost of repair of any physical injury, but not for any diminution in value of the real estate caused by the absence of the goods removed or by any necessity of replacing them. A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate security for the performance of this obligation."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 7, Uniform Conditional Sales Act.
  Purposes. 1. Section 9-313 deals with the problem that certain goods which are the subject of chattel financing become so affixed or otherwise so related to real estate that they become part of the real estate, and that chattel interests would be subordinate to real estate interests except as protected by the priorities regulated by the section. These goods are called "fixtures". Some fixtures also retain their chattel nature in that a chattel financing with respect to them may exist and may continue to be recognized, if notice thereof is given to real estate interests in accordance with this section. But this concept does not apply if the goods are integrally incorporated into the real estate.
  The term "fixture filing" has been introduced and defined. It emphasizes that when a filing is intended to give the priority advantages herein discussed against real estate interests,
the filing must (except as stated below) be for record in the real estate records and indexed therein, so that it will be found in a real estate search.
  Since the determination in advance of judicial decision of the question whether goods have become fixtures is a difficult one, no inference may be drawn from a fixture filing that the secured party concedes that the goods are or will become fixtures. The fixture filing may be merely precautionary.
  2. "Fixture" is defined to include any goods which become so related to particular real estate that an interest in them arises under real estate law and, therefore, goods integrally incorporated into the real estate are clearly fixtures. But under subsection (2) no security interest exists under Article 9 in ordinary building materials incorporated into an improvement on land.
  Goods may be technically "ordinary building materials", e.g., window glass, but if they are incorporated into a structure which as a whole has not become an integral part of the real estate, the rules applicable to the ordinary building materials follow the rules applicable to the structure itself. The outstanding examples presenting this kind of problem are the modern "mobile homes" and the modern prefabricated steel buildings usable as warehouses, garages, factories, etc. In the case of the mobile homes, most of them are erected on leased land and the right of the debtor under a mobile home purchase contract to remove the goods as lessee will make clear that his secured party ordinarily has a similar right. See paragraph (5)(b).
  In cases where mobile homes or prefabricated steel buildings are erected by a person having an ownership interest in the land, the question into which category the buildings fall is one determined by local law. In general, the
governing local law will not be that applicable in determining whether goods have become real property between landlord and tenant, or between mortgagor and mortgagee, or between grantor and grantee, but rather that applicable in a three-party situation, determining whether chattel financing can survive as against parties who acquire rights through the affixation of the goods to the real estate.
  The assertion that no security interest exists in ordinary building materials is only for the operation of the priority provisions of this section. It is without prejudice to any rights which the secured party may have against the debtor himself if he incorporated the goods into real estate or against any party guilty of wrongful incorporation thereof in violation of the secured party's rights.
  3. Under these concepts the section recognizes three categories of goods: (1) those which retain their chattel character entirely and are not part of the real estate; (2) ordinary building materials which have become an integral part of the real estate and cannot retain their chattel character for purposes of finance; and (3) an intermediate class which has become real estate for certain purposes, but as to which chattel financing may be preserved. This third and intermediate class is the primary subject of this section. The demarcation between these classifications is not delineated by this section.
  4. In considering fixture priority problems, there will always first be a preliminary question whether real estate interests per se have an interest in the goods as part of real estate. If not, it is immaterial, so far as concerns real estate parties as such, whether a chattel security interest is perfected or unperfected. In no event does a real estate party acquire an interest in a "pure" chattel just because a security interest therein is
unperfected. If on the other hand real estate law gives real estate parties an interest in the goods, a conflict arises and this section states the priorities.
    (a) The principal exception to the general rule of priority stated in Comment 4(b) based on time of filing or recording is a priority given in paragraph (4)(a) to purchase money security interests in fixtures as against prior recorded real estate interests, provided that the purchase money security interest is filed as a fixture filing in the real estate records before the goods become fixtures or within ten days thereafter. This priority corresponds to one given in Section 9-312(4), and the ten days of grace represents a reduction of the purchase money priority as against prior interests in the real estate under the present Section 9-313, where the purchase money priority exists even though the security interest is never filed.
  It should be emphasized that this purchase money priority with the ten-day grace period for filing is limited to rights against prior real estate interests. There is no such priority with the ten-day grace period as against subsequent real estate interests. The fixture security interest can defeat subsequent real estate interests only if it is filed first and prevails under the usual conveyancing rule recognized in paragraph (4)(b).
    (b) The general principle of priority announced in this section is set forth in paragraph (4)(b). It is basically that a fixture filing gives to the fixture security interest priority as against other real estate interests according to the usual priority rule of conveyancing, that is, the first to file or record prevails. An apparent limitation to this principle set forth in paragraph (4)(b), namely that the secured party must have had priority over any interest of a predecessor in title of the conflicting encumbrancer or owner, is not
really a limitation, but is an expression of the usual rule that a person must be entitled to transfer what he 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.
    (c) A qualification to the rule based on priority of filing or recording is paragraph (4)(d), where priority based on precedence in filing or recording is preserved, but there is no requirement that as against a judgment lienor of the real estate, the prior filing of the fixture security interest must be in the real estate records. The fixture security interest if perfected first should prevail even though not filed or recorded in real estate records, because generally a judgment creditor is not a reliance creditor who would have searched records. Thus, even a prior filing in the chattel records protects the priority of a fixture security interest against a subsequent judgment lien.
  It is hoped that this rule will have the effect of preserving a fixture security interest so filed against invalidation by a trustee in bankruptcy. That would, of course, be the result under Section 60a of the Bankruptcy Act if the time of perfection of the fixture security interest were measured by the judgment creditor test applicable to personal property. It would not be the result if the time of perfection were measured by the purchaser test applicable to real estate. Since the fixture security interest arises against the goods in their capacity as chattels, the bankruptcy courts should apply the judgment creditor test.
The effectiveness of the drafting to achieve its purpose cannot be known certainly until the courts adjudicate the question or until it is settled by amendment to Section 60a of the Bankruptcy Act.
  The phrase "lien by legal or equitable proceedings" is suggested by Section 70c of the Bankruptcy Act, and is intended to encompass all liens on real estate obtained by any of the creditor action therein described.
    (d) A special exception to the usual rule of priority based on precedence in time is the one of paragraph (4)(c) in favor of holders of security interests in factory and office machines, and in certain replacement domestic appliances, as discussed below. This is not as broad an exception as it might seem. To repeat, a fixture conflict is not reached if the goods are held as a matter of local law not to have become part of the real estate, which will frequently be the holding for goods of these types. If the opposite is held, the rule of paragraph (4)(c) operates only if the fixture security interest is perfected before the goods become fixtures. Having been perfected, it would of course have priority over subsequent real estate interests under the rule of paragraph (4)(b). Since it would in almost all cases be a purchase money security interest, it would also have priority over other real estate interests under the purchase-money priority of paragraph (4)(a), discussed in paragraph (a) above. The rule is stated separately because the permitted perfection is by any method permitted by the article, and not exclusively by fixture filing in the real estate records. This rule is made necessary by the confusions of the law as to whether certain machinery and appliances become fixtures.
  As an additional point, in the case of machinery, the separate statement of this rule makes clear that it is not overridden by the
construction mortgage priority of subsection(6) discussed in Comment 4(e) below, as would have been true if reliance had been solely on the purchase money priority. Factory and office machines are not always financed as part of a construction mortgage, and the mortgagee should be alert to conflicting chattel financing of these machines.
  As to appliances, the rule stated is limited to readily removable replacements, not original installations, of appliances which are consumer goods in the hands of the debtor (Section 9-109). To facilitate financing of original appliances in new dwellings as part of the real estate financing of the dwellings, no special priority is given to chattel financing of original appliances. The section leaves to other law of the state the question whether original installations are fixtures to which the protection accorded by this section to construction mortgages would be applicable. Likewise, it is recognized that (when not supplied by tenants) appliances in commercial apartment buildings are intended as permanent improvements, and no special rule is stated for appliances in that case. The special priority rule here stated in favor of chattel financing is limited to situations where the installation of appliances may not be intended to be permanent, i.e., replacement appliances used by the debtor or his family (consumer goods). 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 himself with real estate descriptions or records; indeed, for a purchase-money replacement of consumer goods, perfection without any filing will be possible. (The priority of the construction mortgage has no application to replacement appliances).
    (e) The purchase money priority presents a difficult problem in relation to construction mortgages. The latter will ordinarily have been recorded even before the commencement of delivery of materials to the job, and therefore would be prior in rank to the fixture security interests were it not for the problem of the purchase money priority. Subsection (6) expressly gives priority to the construction mortgage recorded before the filing of the fixture security interest, but this priority of a construction mortgage applies only during the construction period leading to the completion of the improvement. As to additions to the building made long after completion of the improvement, the construction priority will not apply simply because the additions are financed by the real estate mortgagee under an open end clause of his construction mortgage. In such case, the applicable principles will be those of paragraphs (4)(a) and (4)(b). A refinancing of a construction mortgage has the same priority as the mortgage itself.
  The phrase "an obligation incurred for the construction of an improvement" covers both optional advances and advances pursuant to commitment, and both types of advances have the same priority under the section.
  5. The section makes it impossible for a fixture supplier to retain a security interest against a contractor, to the possible surprise and deception of real estate interests, unless the debtor has an interest of record in the real estate. See paragraphs (4)(a) and (b).
  On the other hand, these paragraphs do recognize that fixture filing may be necessary when the debtor is in possession of the real estate (e.g., a lessee) even without an interest of record. This possibility of a filing against a debtor who is not in the real estate chain of title makes it necessary to require the furnishing of the name of a record owner in such
cases. See Sections 9-402(3), item 3; 9-402(5); 9-403(7).
  6. The status of fixtures installed by tenants (as well as such persons as licensees and holders of easements) is defined by paragraph (5)(b) to the effect that if the debtor (tenant or other interest mentioned) has the right to remove the fixture as against a real estate interest, the secured party has priority over that real estate interest.
  7. Real estate lenders and title companies will have little difficulty in locating relevant fixture security interests applicable to particular parcels of real estate because of the provisions as to real estate description in fixture filings, the indexing thereof, and other related provisions in Part 4 of Article 9.
  8. Real estate lending is typically long-term, and is usually done by institutional investors who can afford to take a long view of the matter rather than concentrating on the results of any particular case. It is apparent that the rule which permits and encourages purchase money fixture financing, which in contrast is typically short-term, will result in the modernization and improvement of real estate rather than in its deterioration and will on balance benefit long-term real estate lenders. Because of the short-term character of the chattel financing, it will rarely produce any conflict in fact with the real estate lender. The contrary rule would chill the availability of short-term credit for modernization of real estate by installation of new fixtures and in the long run could not help real estate lenders.
  9. Subsection (8) is an important departure from Section 7 of the Uniform Conditional Sales Act and from much other conditional sales legislation. Under the Uniform Conditional Sales
Act a conditional vendor could not sever and remove the affixed chattel if a "material injury to the freehold" would result. The courts of
various jurisdictions were in sharp disagreement on the meaning of "material injury"; some held that only physical injury was meant; others adopted the so-called "institutional theory" and denied removal whenever the "going value" of the structure would be materially diminished by the removal. Under these rules the conditional vendor either could not remove at all, or, if he could, could damage the structure on removal without becoming accountable to the real estate claimant. The situation was complicated by the fact that it became increasingly difficult to predict what types of goods the courts in a given jurisdiction would hold not subject to removal.
  Subsection (8) abandons the "material injury to the freehold" rule. Instead a secured party entitled to priority may in all cases sever and remove his collateral, subject, however, to a duty to reimburse any real estate claimant (other than the debtor himself) for any physical injury caused by the removal. The right to reimbursement is implemented by the last sentence of subsection (8) which gives the real estate claimant a statutory right to security or indemnity failing which he may refuse permission to remove. The subsection (8) rule thus accomplishes two things: it puts an end to the uncertainty which has grown up under the "material injury" rule, while at the same time it protects the real estate claimant under the reimbursement provisions.
  Cross references:
  Sections 2-107, 9-102(1), 9-104(j), and 9-312(1), and Parts 4 and 5.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Contract": Section 1-201.
  "Creditor": Section 1-201.
  "Debtor": Section 9-105.
  "Encumbrance": Section 9-105.
  "Goods": Section 9-105.
  "Knowledge": Section 1-201.
  "Mortgage": Section 9-105.
  "Person": Section 1-201.
  "Purchase": Section 1-201.
  "Purchaser": Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
  "Writing": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. With the exception of the last subsection, this section has been completely rewritten. Dissatisfaction with the 1962 Text of this section, which has been adopted in South Carolina, was the original motivating force behind the review of Article 9. It was only after the Review Committee became involved with revising Section 9-313 that the concept of a revision of all of Article 9 was adopted.
  2. One of the principal criticisms leveled at the 1962 Text was that it gave fixture financers priority rights over certain mortgagees and other persons claiming interests in the real estate where the fixtures were located without requiring in all cases that the security interest in the fixtures be indexed in the chain of title of the owner of the property. All that is required under the 1962 Text is that a fixture financing statement be filed "in the office where a mortgage on the real estate concerned would be filed or recorded" [Section 36-9-401(1)(b) of the 1976 South Carolina Code]. Presumably, as long as a financing statement covering fixtures was filed somewhere in the same office as real estate interests are filed, whether it be in a separate filing system for such financing statements, or even in the old chattel mortgage books (assuming they were kept in the same office as real estate mortgage
records), the filing requirements of the 1962 Text are satisfied.1 Furthermore there is no requirement in the 1962 Text that the fixture financing statement be indexed in the name of the owner of the property if the debtor is not the owner. This meant that even if a person checking the title to a particular piece of real estate searched all the possible places where a fixture financing statement could be filed, he would not locate a financing statement against a debtor who was not the record owner of the property unless he happened to know about the nonrecord owner debtor; and yet under the UCC priority rules, many such security interests against nonowner debtors are granted priority over holders of interests in the real estate. One common situation in which this result could occur is where a fixture financer enters into a purchase money security interest arrangement for fixtures with a nonowner contractor who is constructing a building on the record owner's property. If the fixture financer perfects his security interest in these goods as fixtures by filing a financing statement naming himself as the secured party and the contractor as the debtor in the office where mortgage records are kept before they became affixed to the property, even though there is no mention of the owner's name on the financing statement, the fixture financer would under Section 9-313(2) and (4) of the 1962 Text have priority over all prior and subsequent persons claiming an interest in the real estate (including in all probability, as will be discussed below, a subsequent advance by a construction mortgagee made after the goods are affixed to the property). In addition, under Section 9-313(5), the fixture financer would have the right to remove the fixtures in the event of a default by the contractor upon payment (or providing proper security for payment) of any cost of repairs to the structure
caused by the removal, even though the removal of the fixtures, (for example all the heating and air conditioning duct work and equipment), might cause a diminution in value in the structure far in excess of the market value of the fixtures. The fixture financer in this case is being given an inordinate amount of leverage without having to give any notice of his possible claims in the owner's chain of title. The unfairness of this result is evident.
  The 1972 Text attempts to resolve these record notice problems in a number of ways. First of all, except as specified below, in order to have any priority over persons claiming an interest in the real estate, a person financing fixtures must file a "fixture filing" [defined in Section 9-313(1)(b) of the 1972 Text] which describes the real estate and designates the name of the record owner if the debtor is not the record owner [see Section 9-402(3) and (5) of the 1972 Text] and the fixture filing must be indexed in the real estate mortgage indexes under the name of both the debtor and any record owner of the real estate [see Section 9-403(7) of the 1972 Text]. These provisions guarantee that the security interest of the fixture financer will be in the chain of title of the record owner. In this connection, the 1972 Text also authorizes the use of a real estate mortgage as a fixture filing if the mortgage meets certain minimal requirements [see Section 9-402(6) of the 1972 Text] and the filing is effective until the mortgage is satisfied [see Section 9-403(b) of the 1972 Text] as opposed to a five-year effective date for other fixture filings. This will make it easier for mortgagees to obtain a perfected security interest in fixtures. Under the 1962 Text, adopted in South Carolina, a mortgage cannot normally qualify as a fixture filing because it lacks the secured party's signature, a requirement that has been eliminated by the 1972 Text (see the South
Carolina Reporter's Notes to Section 9-401 of the 1972 Text). Note, however, that while a real estate mortgage can serve as a fixture filing, it could not satisfy the filing requirements for perfection of a security interest in chattels that are not fixtures. A security interest in nonfixture personalty would have to be perfected under the normal UCC rules; and in most cases, if filing is required, the proper filing places and indexing requirements would be different from those applicable to fixtures. For example, a financing statement perfecting a security interest in any equipment must be filed in the Secretary of State's office. Therefore if there is any reasonable possibility that any of the property listed in the real estate mortgage will not be held to be fixtures (see paragraph 6 below), dual filing will be necessary.
  A second device in the 1972 Text designed to integrate fixture financing in the real estate records is the rule in new Section 9-313 that with certain exceptions which are discussed below, a security interest in a fixture is not valid against any person claiming an interest in the real estate, including any mortgagee, unless the debtor is an owner of record or is in possession of the real estate [see Section 9-313(4)(a) and (b) of the 1972 Text].
  The basic rule prevents the situation described earlier where a subsequent creditor checking the real estate records would not find any record of a fixture security interest against a contractor debtor indexed in the name of the owner of record or occupier of the property [the latter being someone a subsequent creditor could be expected to know about or in the case of a lessee-occupier is probably covered by the exception in Section 9-313(5)(b) discussed below]. In addition, since the security interest of the fixture financer against a nonowner, nonoccupier debtor does not
have priority over all other persons claiming interest in the real estate, the fixture financer cannot remove the fixtures, unless he can qualify to remove them under one of the exceptions. This takes away the improper leverage such a fixture financer might have against an owner or mortgagee under the 1962 Text. In this connection the fixture financer in this situation is not precluded from any possible remedy. He might qualify under one of the four exceptions, which will be discussed in more detail below, and he may have mechanics' lien rights pursuant to Sections 29-5-10 et seq., of the 1976 South Carolina Code.
  There are four exceptions to the general rule precluding priority by a fixture financer over a person claiming an interest in the real estate where the debtor is not the owner of record; the exceptions are as follows: (a) the owner or encumbrancer has consented in writing to the security interest or has disclaimed an interest in the goods as fixtures [Section 9-313(5)(a) of the 1972 Text]; (b) the debtor has a right to remove the goods as against the owner or encumbrancer [Section 9-313(5)(b) of the 1972 Text]; (c) the fixtures are readily removable factory or office machines or readily removable replacements of domestic appliances which are consumer goods [Section 9-313(4)(c) of the 1972 Text]; or (d) the conflicting lienor qualifies as a judgment lien creditor that obtained the lien after the security interest in the fixtures was perfected [Section 9-313(4)(d) of the 1972 Text]. As will be explained more fully below, these four exceptions do not impair the integrity of the record notice integration principle as much as might be expected at first glance.
  (a) The first exception, involving consent or disclaimer by any encumbrancer or owner of record, does not really involve an exception to the record notice rule since the fixture filing
provisions require that to be effective as a proper fixture filing, the filing must be indexed in the real estate mortgage records under the name of the record owner if the "debtor" is not the owner of record (see Section 9-403(7) of the 1972 Text). Therefore a subsequent creditor checking the title to the real estate in question would find record notice of the security interest claimed by the fixture financer, assuming the fixture financer made a proper fixture filing (if he did not, the security interest would have priority over any person who had consented or disclaimed but would be subordinate to the interest of any subsequent owner or encumbrancer). It may well be difficult for the fixture financer to obtain the consent or disclaimer of both the owner and any encumbrancer, especially the latter, but if he does and he makes a proper fixture filing then he will have certain priority rights against persons claiming interests in the real estate and any subsequent creditor will have record notice of the security interest.
  (b) The second exception, which gives the fixture financer priority over any conflicting interest in the real estate involves the situation where the debtor has a right to remove the goods from the property. This is the normal situation with respect to items like shelving and display counters that are placed on leased real estate by the lessee which under the terms of the lease the tenant has the right to remove at the termination of the lease. In commercial leases, these items are often called "trade fixtures", but this rule would also apply to items that are placed on leased real estate by the consumer. One typical example would be a financed mobile home placed on leased real estate. If under the terms of the real estate lease the lessee has the right to remove the mobile home at the termination of the lease, which would typically be the case, then the
financer of the mobile home would take priority over the owner or encumbrancer of the real estate under Section 9-313(5)(b) of the 1972 Text.2 Note that subsection (5)(b) also continues the secured party's priority over the owner or any encumbrancer for a reasonable time after the debtor's right to remove the property terminates. This language is designed primarily to cover the situation where the lessee is in default under the lease and the lease or some state statute stipulates that the lessee's right to remove the "fixtures" is dependent on his not being in default under the lease. In most situations the lessee would also be in default under any security agreement with a financer of the goods in question and if the secured party exercises his default rights within a reasonable time, his priority over the lessor or encumbrancer is protected, barring any supervening rights granted by another statute.3 Of course, if the lease or other instrument stipulates that the items in question will belong to the lessor at the termination of the lease, then subsection (5)(b) would not apply and the secured party would not have priority over the lessor or any encumbrances of the real estate unless he could qualify for priority under some other rule in Section 9-313. See Greenville v. Washington American League Baseball Club, 205 S.C. 495, 32 S.E. 2d 777 (1945), which contains a detailed summary of South Carolina cases involving "fixtures" placed on leased real estate by lessees. This rule basically prevents the fixture financer from having any greater rights than the lessee in the fixtures. As is the case with subsection 5(a) rule dealing with consent or disclaimer, subsection 5(b) does not really constitute an exception to the concept of integration of fixture financing into the real estate title records since under real estate law and encumbrancer or other creditor claiming an
interest in the real estate can have no greater rights in these removable items than the owner-lessor has irrespective of record notice of the fixture financer's security interest.4
  (c) The third exception to the normal priority and record notice rules in subsection 4(c) for readily removable factory or office machines and readily removable replacements of domestic appliances that are consumer goods is really not that significant because most of the items qualifying for this exception would not be held to be fixtures and therefore persons claiming an interest in the real estate would have no interest in these goods since title to them would not pass with title to the realty. See, e.g., Saye v. Hill, 100 S.C. 21, 84 S.E. 307 (1915) which held that an engine bolted to heavy timbers and a grist mill fastened to the floor of a building were not fixtures. Note that if such goods were held to be fixtures, then so long as the fixture financer has perfected his security interest "by any method" permitted by Article 9, before the goods become fixtures, he will have priority over owners and encumbrancers of the real estate, even though no fixture filing has been made. Thus in the case of readily removable factory machines, the fixture financer's priority will be protected regardless of whether the goods are held to be fixtures if he files a financing statement covering the goods as equipment in the appropriate place, which in most cases would be the Secretary of State's office, before the goods are installed or affixed to the real estate. As for replacement of domestic appliances, the fixture financer will have priority over owners and encumbrancers of the realty even if no filing of any kind is made if the security interest qualifies as a purchase money security interest in consumer goods, which will be the case in most instances, since such security interests are automatically perfected as the time of
attachment under Section 9-302(1)(d). The Article 9 Review Committee concluded that the cost of checking the real estate records to obtain a proper description of the property and the name of the record owner and the added cost of a fixture filing was unjustified for such items, especially with respect to replacement consumer appliances which are for the most part handled on a purchase money security interest basis by department, hardware, and building supply stores. In addition, any mortgagee or other person claiming an interest in the real estate will receive the benefit of any equity in any of the items in question that are ultimately determined to be fixtures. Finally, an encumbrancer of the real estate who wants to have some kind of perfected security interest in any goods qualifying under subsection 5(c) could file as to these items both as fixtures and nonfixtures, in which case he would have priority over basically all persons other than those holding perfected purchase money security interests in the items in question [if the goods are not fixtures, the appropriate priority sections would be Section 9-312(4) and (5); if they are fixtures, the controlling section would be Section 9-313(4)(a)].
  (d) The fourth exception in the record notice concept in subsection 4(d), which allows a fixture financer to take priority over a judicial lien creditor that obtains the lien after the security interest of the fixture financer is perfected in any manner authorized by Article 9. This exception is based on the theory that the judgment lien creditor is not someone who makes a records search before extending credit and therefore is not a reliance creditor that would likely be misled by the failure of the security interest of the fixture financer to be indexed in the real estate records. Note also that another purpose served by this exception is to protect a fixture
financer who may have failed to file a fixture financing statement but did perfect his security interest in some other way (e.g., as equipment) against the claim by a trustee-in-bankruptcy that the security interest is invalid under Sections 60(a) and 70(a) of the Bankruptcy Act. See Official Comment 4(c).
  In summary, real estate lawyers should be pleased with the changes in the fixture rules requiring record notice in the real estate mortgage records of most security interests in fixtures. The exceptions are relatively narrow and reasonable and should not produce any serious problems in practice. The exception most likely to cause difficulties is the one for readily removable factory or office machines, but as was pointed out above for the most part these items are not fixtures anyway in which case a person claiming an interest only in the real estate could not claim an interest in them. See also paragraph 4(b) of the South Carolina Reporter's Notes to this section.
  3. Another portion of the revised Section 9-313 of the 1972 Text that ought to be pleasing to real estate lawyers and mortgagees is subsection (6), which gives a construction mortgage [defined in Section 9-313(1)(c) of the 1972 Text] priority over even a fully perfected purchase money security interest in fixtures if the goods become fixtures before the completion of the construction and the construction mortgage is recorded before the goods become affixed to the property, which will normally be the case. In this connection it is important to note that this construction mortgage priority applies to both optional and obligatory advances and to refinanced as well as original construction mortgages. Although there are almost no cases on this issue, most authorities have concluded that under the 1962 Text of Section 9-313 a purchase money security interest in the fixtures which attaches to the goods
before they become affixed to the real estate has priority over a construction mortgage in almost all circumstances where the fixture security interest is perfected prior to the time of any disbursement of funds under the construction mortgage following the installation of the fixtures.5 The strongest case for the mortgagee would be the situation where a predisbursement search for fixture filings had been made after the fixtures had been installed but before the fixture security interest had been filed of record and the filing then occurs before the disbursement, which is made within a few days of the search; but even in this case a ruling in favor of the mortgagee is not certain under the wording of Sections 9-313(2) and (4) of the 1962 Text in spite of the strong argument of detrimental reliance. Therefore this special priority to construction mortgages, which is based on the premise that most construction mortgagees expect to finance and have first priority on fixtures represents a major change from the 1962 Text.
  This special priority for construction mortgagees does not extend, however, to improvements made after the initial construction has been completed even if these improvements are made under an open-end construction mortgage (see Official Comment 4(e)); and ipso facto, it does not apply to any advances made under an open-end nonconstruction mortgage. See the discussion of Section 29-3-50 of the 1976 South Carolina Code in footnote 5. Note also that the special priority only applies to subsection 4(a) of Section 9-313, dealing with purchase money security interests in fixtures, so that a fixture that qualifies for priority over a real estate encumbrancer under the other provisions of subsections (4) or (5) would take priority over a construction mortgage. For example, a construction mortgage would not have priority over a perfected security interest in readily
removable factory or office machines. See paragraph 2(c) above for further discussion of this point. The difference in treatment is rationalized on the basis that a construction mortgagee does not ordinarily finance the purchase of these types of goods and therefore would not expect to have a security interest in them that could take priority over a fixture financer financing such goods. See Official Comment 4(d) of the 1972 Text. If the construction mortgagee does end up financing such items, then it must take steps to be sure it obtains a fully perfected purchase money security interest in goods in question both as fixtures and nonfixtures (as was pointed out in paragraph 4(c), most goods meeting the subsection (4)(c) test will not be held to be fixtures) in order to guarantee that it will have priority over any competing security interest in the goods.
  4. With the exception of the construction mortgagee situation described in the preceding paragraph, a purchase money security interest in fixtures that meets the requirements of subsection 4(a) of the 1972 Text is given essentially the same favorable super priority status as is given a perfected purchase money security interest in nonfixtures that meets the requirements of Section 9-312(4). In both situations, the purchase money financer is given this special priority if proper perfection is accomplished within a specified ten-day period (in the case of fixtures, the ten-day period begins to run when the goods become fixtures, i.e., they are installed on the premises; and in the case of nonfixtures the ten-day period begins on the day the debtor receives the collateral). One difference, however, is that the purchase money fixture financer does not have priority over any encumbrancer or owner that obtains this interest in the interval between affixation and perfection; whereas the
purchase money financer of nonfixtures takes priority over all intervening creditors if he perfects within the ten-day period. The difference is another example of the deference given to representatives of real estate interests in the 1972 Text. An argument based on reliance by intervening creditors is just as compelling in the nonfixture situation as it is when fixtures are involved.
  5. In addition to the changes and additions discussed above, the following modifications in Section 9-313 are worthy of brief comment.
    (a) The formulation of the concept of a fixture is changed to indicate that building materials incorporated into an improvement on real estate can legally qualify as fixtures (this is true at common law but was unclear under the 1962 Text); but the 1972 Text specifies that no security interest can exist in such building materials so the net result is the same under both the 1972 and 1962 Texts. Compare Section 9-313(1)(c) of the 1972 Text with Section 9-313(1) of the 1962 Text. In this connection, both the 1972 and 1962 Texts state that the determination of what goods constitute fixtures is left up to the case law of the state where the fixtures are located. Due to the wide divergence in the cases, it proved to be impossible to draft a satisfactory comprehensive definition of a fixture. The South Carolina cases will be discussed in paragraph 6 below.
  (b) Under subsections (2) and (4) of the 1962 Text a purchase money financer of fixtures has priority over most interests in the real estate, even if the security interest is never perfected. This can create some awkward and inequitable situations. For example, a mortgagee might forego its right to foreclose on a defaulted mortgage in reliance on the presence of fixtures that were not affixed to the premises at the time the mortgage was perfected and the absence of any notice of record of a
security interest in the fixtures, only to find out later that such an unperfected preaffixed security interest in the fixtures exists and takes priority over the mortgage. The 1972 Text prevents this situation from occurring. Under the 1972 Text the special priority of purchase money security interests in fixtures is curtailed in three respects: (1) the subordination to construction mortgages, discussed in paragraph 3 above; (2) the priority rights of real estate interests arising after affixation but before perfection, assuming a proper fixture filing is made within ten days of affixation (see Official Comment 4(a)); and (3) the loss of any special priority rights if it is not perfected by a fixture filing within the required ten-day period, in which case it would have priority over persons claiming an interest in the real estate only if it qualifies for such priority under subsection 4(b), (c), or (d) or 5(a) or (b) of the 1972 Text. One effect of these changes is that an unperfected security interest in true fixtures almost never has priority over real estate interests and as a consequence it is much less likely under the 1972 Text than under the 1962 Text that a person claiming an interest in the real estate will be misled to his later detriment by the absence of record notice of the fixtures. In this respect, the new purchase money fixture rules tie in with the other record notice provisions discussed in paragraph 2 above.
  Even though the super priority of purchase money security interests in fixtures under the 1972 Text is somewhat less than under the 1962 Text, it is still sufficient to provide adequate protection for the sellers and lenders engaged in purchase money financing of fixtures as long as they follow carefully the perfection rules set out in the UCC. The most difficult problem the purchase money fixture financer has under the 1972 Text is coping with his subordination
to a construction mortgage. If a construction mortgage meeting the subsection (6) requirements exists, then the fixtures supplier will in effect have a second lien on any fixtures he finances unless he can obtain a subordination or disclaimer agreement from the mortgagee or the security interest qualifies for priority over the construction mortgage under the rules in subsections 4(b) or (c) or 5(b) (see paragraphs 2 and 3 above). Nevertheless, the respective rights of the fixture financer and mortgagee are much clearer under the 1972 Text than they are under the 1962 Text and the decision of the fixture supplier or lender to finance the fixtures in question boils down to a rational business judgment of the risks involved. In this connection, the fixture financer can obtain a second mortgage on the real estate as added protection if he wants to go through with the financing and cannot achieve priority over the construction mortgagee under any of the other priority rules in Section 9-313(4) and (5).
  (c) The basic priority rule for fixtures that do not qualify for special status as purchase money security interests under subsection 4(a) is set forth in subsection 4(b). Essentially it is a race notice rule. See Official Comment 4(b). The other priority rules in subsections 4 and 5 are discussed in paragraph 2 above. See also Official Comments 4(c) and (d) and 6.
  (d) The changes in the wording in the subsection dealing with the rights of a fixture financer to remove the fixtures [subsection (8) in the 1972 Text and subsection (5) in the 1962 Text] are technical and nonsubstantive.
  6. The provisions of Section 9-313 apply only if the goods in question are in fact fixtures. If they are not fixtures, then persons with an interest only in the real estate where they are located have no legal rights in the goods under the UCC6 since by definition fixtures are goods that "become so related to particular real
estate that an interest in them passes under real estate law" [Section 9-313(1)(a) of the 1972 Text]. However, there is nothing in the UCC that prevents a person claiming an interest in the real estate from also claiming a security interest in nonfixture goods or other collateral belonging to the debtor; but if he does so he must perfect his security interest according to the perfection rules for nonfixtures in Parts 3 and 4 of this chapter and priority rights vis-a-vis other creditors claiming an interest in this collateral would be determined under Section 9-312 rather than Section 9-313.
  As the Official Comments indicate, the determination of what goods constitute fixtures is left up to state case law. Unfortunately, South Carolina case law is not that helpful in formulating any clear definition of a fixture that provides a high degree of predictability. The primary reason for this is the basic rule consistently followed by the South Carolina Supreme Court that whether a particular item is a fixture depends primarily on the intention of the parties and the issue of intention is one to be decided by the jury. As a consequence, there are confusing and conflicting decisions involving the same types of goods which can be reconciled only on the basis that the jury in one case found the "intention" of the parties to be that the items were fixtures but in another case that they were not fixtures. Compare, e.g., Carroll v. Britt, 227 S.C. 9, 86 S.E. 2d 612 (1955) with Gilbert v. Easterling, 217 S.C. 267, 60 S.E. 2d 595 (1950). See also Planter's Bank v. Lummus Cotton Gin Co., 132 S.C. 16, 128 S.E. 876 (1925) in which the Supreme Court, in reversing a directed verdict by the trial judge that the ginning equipment in question did not qualify as fixtures, reviewed all the prior cases involving cotton gins.
  According to the Lummus case, the elements of a fixture are:
  "(1) actual or constructive annexation of the chattel to the realty or to something appurtenant thereto; (2) appropriation of the chattel to the use or purpose of that part of the realty with which it is connected; (3) the intention of the party making the annexation to make the chattel a permanent accession to the freehold, this intention being inferred from the nature of the article affixed, the relation and situation of the party making the annexation, the structure and mode of annexation, and the purpose or use for which the annexation has been made." 132 S.C. at 23, 128 S.E. at 879.
  The case law in South Carolina is not unlike that of other states, which for the most part follow the "intention" test. In South Carolina, as in other states, there are some areas where the case law is reasonably consistent. For example, as was pointed out in paragraph 2 above, the South Carolina Supreme Court has consistently ruled that trade fixtures placed on leased premises by a tenant are not fixtures if the tenant has the right to remove the fixtures at the termination of the lease. While the decision in each case is resolved on the "intention" test, the ultimate result in most cases is highly predictable since it is clear from the terms of the lease and the dealings between the parties whether the landlord or the tenant will own the trade fixtures at the end of the lease. See Greenville v. Washington American League Baseball Club, 205 S.C. 495, 32 S.E. 2d 777 (1945). Nevertheless, because the "intention" test requires a determination by a jury on a case-by-case basis, there are bound to be a large number of situations where prior case law will not provide enough of a basis to determine at the time the goods in question are financed whether they will ultimately be held to be fixtures. For this reason, in these
borderline cases prudence would dictate that the person financing the "fixtures" maximize his priority rights by making both a fixture filing and an additional filing on the basis that the goods are not fixtures.
  7. In summary, the Article 9 Review Committee has done a remarkable job in revising this section. The new rules providing basic integration of fixture financing into the real estate mortgage records correct a serious defect in the 1962 Text. In addition, the priority rules in the 1972 Text are more specific and rational than the rules in the 1962 Text. Although dual filing as fixtures and nonfixtures will be necessary in cases involving goods that are not clearly fixtures in order to maximize priority protection, dual filing in such cases is also necessary under the 1962 Text. Unfortunately some dual filing is inevitable, given the "intention of the parties" test applied in South Carolina and most other states to determine if particular goods are fixtures.
  1Note that prior to the adoption of the UCC in South Carolina the filing of chattel mortgages covering fixtures in the chattel mortgage books was held to be record notice to any subsequent creditor or other person claiming an interest in the land, contrary to the rule in many other states which required indexing of such fixture security interests in the real estate mortgage records to constitute record notice to persons with interests in the real estate. See Liddell v. Cork, 120 S.C. 481, 113 S.E. 327 (1922).
  2As is pointed out in paragraphs 5 and 6 of the South Carolina Reporter's Notes to Section 9(a) of this act, there is a conflict between the priority rules in the UCC and Sections 27-39-50 and 27-39-260 of the 1976 South Carolina Code which deal with rights of
landlords vis-a-vis persons claiming interests in chattels located on leased real estate. Sections 27-39-50 and 27-39-260 have therefore been repealed because if not, a lessor of real estate would have certain rights under these statutes that might undercut the priority given a fixture financer under Section 9-313.
  3See Note 2 above.
  4Any real estate lease in excess of twelve months is required to be recorded to be valid against subsequent creditors under Section 30-7-10 of the 1976 South Carolina Code so that in many situations the subsequent creditor will have record notice of the real estate lease. However, failure to record the real estate lease would only affect the rights of the lessor vis-a-vis any of his subsequent creditors; it would have no impact on the priority rights of the fixture financer who is a creditor of the lessee.
  5See e.g., Kripke, Fixtures under the Uniform Commercial Code, 64 Column. L. Rev. 70-74 (1964). One position that might be advanced in favor of giving the mortgage priority over the preaffixation fixture financer in situations involving advances made under an open-mortgage statute, Section 29-3-50 of the 1976 South Carolina Code, subsequent advances are given the same priority as the original mortgage, Central Production Credit Assoc. v. Page,-S.C., , 231 S.E. 2d 210 (1977), McMillan Feed Mills, Inc. v. Mayer, 265 S.C. 500, 220 S.E. 2d 221 (1975). The problem with this argument is that a fixture financer with a security interest which attaches to the goods before they become affixed to the real estate takes priority over all prior real estate interests (see Section 9-313(2) and (4) of the 1962 Text of the UCC) and one plausible
construction of Section 29-3-50 is that since the future advances related back to the original recording of the mortgage for priority purposes, any advances under the mortgage made subsequent to the fixture financer's security interest would, like the original mortgage, be a prior interest and therefore the fixture financer would have priority. The only other argument the mortgagee can make is that any subsequent advance he makes takes priority over the fixture financer under Section 9-313(4)(c) of the 1962 Text as an advance "made or contracted for without knowledge of the security interest and before it was perfected." Most authorities have concluded that this language refers only to advances made or contracted for after the goods have become affixed to the real estate but before the fixture financer has made a proper fixture filing on the grounds that only in this situation can the mortgagee legitimately argue that he relied on the absence of a security interest in the fixtures in making or contracting to make his subsequent advance. See e.g., Kripke, supra. Under this interpretation, there would be only a few cases where the mortgagee making the subsequent advances will have priority over a fixture financer. In most situations, the fixture financer will have a security interest that is attached and perfected before the subsequent advance is made or contracted for by the mortgage and therefore he will have priority over the mortgage.
  6Real estate claimants might have a claim in the goods under some other state statute, however. See Note 2 supra.
  "Section 36-9-314. Accessions.
  (1) 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 36-9-315(1).
  (2) A security interest which attaches to goods after they become part of a whole is valid against all persons subsequently acquiring interests in the whole except as stated in subsection (3), but is invalid against any person with an interest in the whole at the time the security interest attaches to the goods who has not in writing consented to the security interest or disclaimed an interest in the goods as part of the whole.
  (3) The security interests described in subsections (1) and (2) do not take priority over:
    (a) a subsequent purchaser for value of any interest in the whole; or
    (b) a creditor with a lien on the whole subsequently obtained by judicial proceedings; or
    (c) a creditor with a prior perfected security interest in the whole to the extent that he makes subsequent advances if the subsequent purchase is made, the lien by judicial proceedings obtained or the subsequent advance under the prior perfected security interest is made or contracted for without knowledge of the security interest and before it is perfected. A purchaser of the whole at a foreclosure sale other than the holder of a perfected security interest purchasing at his own foreclosure sale is a subsequent purchaser within this section.
  (4) When under subsections (1) or (2) and (3) a secured party has an interest in accessions which has priority over the claims of all persons who have interests in the whole, he may on default subject to the provisions of Part 5 remove his collateral from the whole but he must reimburse any encumbrancer or owner of the whole who is not the debtor and who has not otherwise agreed for the cost of repair of any physical
injury but not for any diminution in value of the whole caused by the absence of the goods removed or by any necessity for replacing them. A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate security for the performance of this obligation."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. To state when a secured party claiming an interest in goods installed in or affixed to other goods is entitled to priority over a party with a security interest in the whole.
  2. This section changes prior law in that the secured party claiming an interest in a part (e.g., a new motor in an old car) is entitled to priority and has a right to remove even though under other rules of law the part now belongs to the whole.
  3. This section does not apply to goods which, for example, are so commingled in a manufacturing process that their original identity is lost. That type of situation is covered in Section 9-315. Section 9-315 should also be consulted for the effect of a financing statement which claims both component parts and the resulting product.
  Cross references:
  Sections 9-203(1), 9-303 and 9-312(1), and Part 5.
  Point 3: Section 9-315.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Creditor": Section 1-201.
  "Debtor": Section 9-105.
  "Goods": Section 9-105.
  "Knowledge": Section 1-201.
  "Person": Section 1-201.
  "Purchaser": Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
  "Value": Section 1-201.
  "Writing": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
  "Section 36-9-315. Priority when goods are commingled or processed.
  (1) If a security interest in goods was perfected and subsequently the goods or a part of the goods have become part of a product or mass, the security interest continues in the product or mass if:
    (a) the goods are so manufactured, processed, assembled, or commingled that their identity is lost in the product or mass; or
    (b) a financing statement covering the original goods also covers the product into which the goods have been manufactured, processed, or assembled.
  In a case to which paragraph (b) applies, no separate security interest in that part of the original goods which has been manufactured, processed, or assembled into the product may be claimed under Section 36-9-314.
  (2) When under subsection (1) more than one security interest attaches to the product or mass, they rank equally according to the ratio that the cost of the goods to which each interest originally attached bears to the cost of the total product or mass."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. To state when a secured party whose collateral contributes to a product has
priority over others who have conflicting claims in the same product.
  2. This section changes the law in some jurisdictions where a security interest in goods (e.g., raw materials) was lost when the goods lost their identity by being commingled or processed. Under this section the security interest continues in the resulting mass or product in the cases stated in subsection (1).
  3. This section applies not only to cases where flour, sugar, and eggs are commingled into cake mix or cake, but also to cases where components are assembled into a machine. In the latter case a secured party is put to an election at the time of filing, by the last sentence of subsection (1), whether to claim under this section or to claim a security interest in one component under Section 9-314.
  4. Subsection (2) is new and is needed because under subsection (1) it is possible to have more than one secured party claiming an interest in a product. The rule stated treats all such interests as being of equal priority entitled to share ratably in the product.
  Cross references:
  Sections 9-203(1), 9-303, 9-312(1), and 9-314.
  Definitional cross references:
  "Goods": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
  "Section 36-9-316. Priority subject to subordination.
  Nothing in this chapter prevents subordination by agreement by any person entitled to priority."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. The several preceding sections deal elaborately with questions of priority. This section is inserted to make it entirely clear that a person entitled to priority may effectively agree to subordinate his claim. Only the person entitled to priority may make such an agreement; his rights cannot be adversely affected by an agreement to which he is not a party.
  Cross references:
  Sections 1-102 and 9-312(1).
  Definitional cross references:
  "Agreement": Section 1-201.
  "Person": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
  "Section 36-9-317. Secured party not obligated on contract of debtor.
  The mere existence of a security interest or authority given to the debtor to dispose of or use collateral does not impose contract or tort liability upon the secured party for the debtor's acts or omissions."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 12, Uniform Trust Receipts Act.
  Purposes. There were a few common law decisions, mostly in cases involving trust receipts, which suggested, if they did not hold, that a secured party who gave his debtor liberty of sale might be liable (for example, for breach of warranty) on the debtor's contracts of sale. The theory was grounded on the law of agency; the debtor being regarded as selling agent for
the secured party as principal. This section rejects that theory. Section 12 of the Uniform Trust Receipts Act provided that the entruster was not subject to liability, merely because of his status as entruster, on sale of the goods subject to trust receipt. This section adopts the policy of the prior act and states it in general terms.
  Cross reference:
  Section 2-210(4).
  Definitional cross references:
  "Collateral": Section 9-105.
  "Contract": Section 1-201.
  "Debtor": Section 9-105.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The 1972 Text makes no change in this section.
  "Section 36-9-318. Defenses against assignee; modification of contract after notification of assignment; term prohibiting assignment ineffective; identification and proof of assignment.
  (1) Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in Section 36-9-206 the rights of an assignee are subject to:
    (a) all terms of the contract between the account debtor and assignor and any defense or claim arising from the terms of the contract;
    (b) any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives notification of the assignment.
  (2) So far as the right to payment or a part of the payment under an assigned contract has not been fully earned by performance, and notwithstanding notification of the assignment,
any modification of or substitution for the contract made in good faith and in accordance with reasonable commercial standards is effective against an assignee unless the account debtor has otherwise agreed, but the assignee acquires corresponding rights under the modified or substituted contract. The assignment may provide that the modification or substitution is a breach by the assignor.
  (3) The account debtor is authorized to pay the assignor until the account debtor receives notification that the amount due or to become due has been assigned and that payment is to be made to the assignee. A notification which does not reasonably identify the rights assigned is ineffective. If requested by the account debtor, the assignee must seasonably furnish reasonable proof that the assignment has been made, and unless he does so the account debtor may pay the assignor.
  (4) A term in any contract between an account debtor and an assignor is ineffective if it prohibits assignment of an account or prohibits creation of a security interest in a general intangible for money due or to become due or requires the account debtor's consent to the assignment or security interest."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 9(3), Uniform Trust Receipts Act.
  Purposes. 1. Subsection (1) makes no substantial change in prior law. An assignee has traditionally been subject to defenses or setoffs existing before an account debtor is notified of the assignment. When the account debtor's defenses on an assigned claim arise from the contract between him and the assignor, it makes no difference whether the breach giving rise to the defense occurs before or after the account debtor is notified of the assignment
[paragraph (1)(a)]. The account debtor may also have claims against the assignor which arise independently of that contract; an assignee is subject to all such claims which accrue before, and free of all those which accrue after, the account debtor is notified [paragraph (1)(b)]. The account debtor may waive his right to assert claims or defenses against an assignee to the extent provided in Section 9-206.
  2. Prior law was in confusion as to whether modification of an executory contract by account debtor and assignor without the assignee's consent was possible after notification of an assignment. Subsection (2) makes good faith modifications by assignor and account debtor without the assignee's consent effective against the assignee even after notification. This rule may do some violence to accepted doctrines of contract law. Nevertheless it is a sound and indeed a necessary rule in view of the realities of large scale procurement. When for example it becomes necessary for a government agency to cut back or modify existing contracts, comparable arrangements must be made promptly in hundreds and even thousands of subcontracts lying in many tiers below the prime contract. Typically the right to payments under these subcontracts will have been assigned. The government, as sovereign, might have the right to amend or terminate existing contracts apart from statute. This subsection gives the prime contractor (the account debtor) the right to make the required arrangements directly with his subcontractors without undertaking the task of procuring assents from the many banks to whom rights under the contracts may have been assigned. Assignees are protected by the provision which gives them automatically corresponding rights under the modified or substituted contract. Notice that subsection (2) applies only so far as the right to payment has not been earned by performance, and
therefore its application ends entirely when the work is done or the goods furnished.
  3. Subsection (3) clarifies the right of an account debtor to make payment to his seller-assignor in an "indirect collection" situation (see comment to Section 9-308). So long as the assignee permits the assignor to collect claims or leaves him in possession of chattel paper which does not indicate that payment is to be made at some place other than the assignor's place of business, the account debtor may pay the assignor even though he may know of the assignment. In such a situation an assignee who wants to take over collections must notify the account debtor to make further payments to him.
  4. Subsection (4) breaks sharply with the older contract doctrines by denying effectiveness to contractual terms prohibiting assignment of sums due and to become due under contracts of sale, construction contracts, and the like. Under the rule as stated, an assignment would be effective even if made to an assignee who took with full knowledge that the account debtor had sought to prohibit or restrict assignment of the claims.
  It is only for the past hundred years that our law has recognized the possibility of assigning choses in action. The history of this development, at law and equity, is in broad outline well known. Lingering traces of the absolute common law prohibition have survived almost to our own day.
  There can be no doubt that a term prohibiting assignment of proceeds was effective against an assignee with notice through the nineteenth century and well into the twentieth. Section 151 of the Restatement of Contracts (1932) so states the law without qualification, but the changing character of the law is shown in the proposed Section 154 of the Restatement, Second, Contracts.
  The original rule of law has been progressively undermined by a process of erosion which began much earlier than the cited section of the Restatement of Contracts would suggest. The cases are legion in which courts have construed the heart out of prohibitory or restrictive terms and held the assignment good. The cases are not lacking where courts have flatly held assignments valid without bothering to construe away the prohibition. See 4 Corbin on Contracts (1951) Sections 872, 873. Such cases as Allihusen v. Caristo Const. Corp., 303 N.Y. 446, 103 N.E. 2d 891 (1952), are rejected by this subsection.
  This gradual and largely unacknowledged shift in legal doctrine has taken place in response to economic need; as accounts and other rights under contracts have become the collateral which secures an ever increasing number of financing transactions, it has been necessary to reshape the law so that these intangibles, like negotiable instruments and negotiable documents of title, can be freely assigned.
  Subsection (4) thus states a rule of law which is widely recognized in the cases and which corresponds to current business practices. It can be regarded as a revolutionary departure only by those who still cherish the hope that we may yet return to the views entertained some two hundred years ago by the Court of King's Bench.
  5. The Federal Assignment of Claims Act of 1940 - to which of course this section is subject - requires that assignments of claims against the United States be filed as provided in that act. Many large business enterprises, situated like the United States in that claims against them are held by hundreds or thousands of subcontractors or suppliers, often require in their contract or purchase order forms that assignments against them be filed in a prescribed way. Subsection (3) requires reasonable identification of the account
assigned and recognizes the right of an account debtor to require reasonable proof of the making of the assignment and to that extent validates such requirements in contracts or purchase order forms. If the notification does not contain such reasonable identification or if such reasonable proof is not furnished on request, the account debtor may disregard the assignment and make payment to the assignor. What is "reasonable" is not left to the arbitrary decision of the account debtor; if there is doubt as to the adequacy either of a notification or of proof submitted after request, the account debtor may not be safe in disregarding it unless he has notified the assignee with commercial promptness as to the respects in which identification or proof is considered defective.
  6. If the thing to be assigned is the beneficiary's right under a letter of credit, Section 5-116 should be consulted.
  Cross references:
  Point 1: Section 9-206.
  Point 3: Sections 9-205 and 9-308.
  Point 4: Section 2-210(2) and (3).
  Point 6: Section 5-116.
  Definitional cross references:
  "Account": Section 9-106.
  "Account debtor": Section 9-105.
  "Agreement": Section 1-201.
  "Contract": Section 1-201.
  "Good faith": Section 1-201.
  "Party": Section 1-201.
  "Receives notification": Section 1-201.
  "Rights": Section 1-201.
  "Sale": Sections 2-106 and 9-105.
  "Seasonably": Section 1-204.
  "Term": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. The principal changes conform to the elimination of the term "contract right" in Section 9-106. As is pointed out in the Official Comments and South Carolina Reporter's Notes to Section 9-106, contract rights have been included in an expanded definition of accounts in the 1972 Text.
  2. Minor changes in subsections (3) and (4) eliminate technical difficulties in the 1962 Text which arose out of the fact that the term "account debtor" used in those subsections is defined to include debtors under general intangibles and chattel paper, and is therefore broader than the term "account" heretofore used in these subsections. Subsection (4) is broadened to apply to general intangibles for money due as well as to accounts.
  3. Although there has been no change in subsection (4), or in Section 9-206 to which it refers, it is worth noting that the South Carolina Consumer Credit Code prohibits the use of a waiver of defense clause in a transaction within its purview. See Section 37-2-404 of the 1976 South Carolina Code, as amended. See also related rules in Sections 37-3-410 and 37-3-411. Pursuant to Section 9-203(4) of the 1972 Text these provisions in the Consumer Credit Code would prevail over any contrary rule in the UCC. See the Reporter's Notes to Sections
9-203 and 1-105. Note that consumer credit transactions would also be subject to the FTC Rule on Preservation of Consumer's Claims and Defenses, 16 C. F. R. Sections 433.1 and 433.2.
  "Section 36-9-319. Sale of secured property without consent.
  Notwithstanding Section 36-9-311, any person who shall sell or dispose of any personal property subject to a security interest, except
for personal property titled by the South Carolina Department of Highways and Public Transportation or the Boating Division of the South Carolina Wildlife and Marine Resources Department, without the written consent of the secured party, and shall fail to pay the debt secured by the security interest within ten days after sale or disposal or shall fail in this time to deposit the amount of the debt with the clerk of the court of common pleas for the county in which the secured party resides is guilty of a misdemeanor and upon conviction must be fined not more than five hundred dollars or imprisoned for not more than one year, or both.
  This section does not apply when the sale is made without knowledge or notice of the security interest by the person selling the property. When the value of the property is less than one thousand dollars, the offense is triable in the magistrate's court and the punishment must be not more than is permitted by law without presentment or indictment by the grand jury. Otherwise, the offense is triable in the court of general sessions."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section, enacted as Act 525 of 1978, effective June 9, 1978, provides criminal penalties for disposing of personal property subject to a security interest where the proceeds are not applied to the debt. It replaces a similar provision in the 1962 South Carolina Code of Laws (Section 45-157) which was inadvertently left out of the 1976 Code and therefore repealed by implication.
"Part 4
Filing
  Section 36-9-401. Place of filing; erroneous filing; removal of collateral.
  (1) The proper place to file in order to perfect a security interest is as follows:
    (a) when the collateral is equipment used in farming operations, or farm products, or accounts or general intangibles arising from or relating to the sale of farm products by a farmer, or consumer goods, then in the office of the register of mesne conveyances or the clerk of court in the county of the debtor's residence or if the debtor is not a resident of this State then in the office of the register of mesne conveyances or the clerk of court in the county where the goods are kept, and in addition when the collateral is crops growing or to be grown in the office of the register of mesne conveyances or the clerk of court in the county where the land is located;
    (b) when the collateral is timber to be cut or is minerals or the like (including oil and gas) or accounts subject to subsection (5) of Section 36-9-103, or when the financing statement is filed as a fixture filing (Section 36-9-313) and the collateral is goods which are or are to become fixtures, then in the office where a mortgage on the real estate would be filed or recorded;
    (c) in all other cases, in the office of the Secretary of State.
  (2) A filing which is made in good faith in an improper place or not in all of the places required by this section is nevertheless effective with regard to any collateral as to which the filing complied with the requirements of this chapter and is also effective with regard to collateral covered by the financing
statement against any person who has knowledge of the contents of the financing statement.
  (3) A filing which is made in the proper place in this State continues effective even though the debtor's residence or place of business or the location of the collateral or its use, whichever controlled the original filing, is thereafter changed.
  (4) The rules stated in Section 36-9-103 determine whether filing is necessary in this State.
  (5) Notwithstanding the preceding subsections, and subject to subsection (3) of Section 36-9-302, the proper place to file in order to perfect a security interest in collateral including fixtures of a transmitting utility is the office of the Secretary of State. This filing constitutes a fixture filing (Section 36-9-313) as to the collateral described which is or is to become fixtures.
  (6) For the purposes of this section, the residence of an organization is its place of business if it has one or its chief executive office if it has more than one place of business."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 4, Uniform Trust Receipts Act; Sections 6 and 7, Uniform Conditional Sales Act.
  Purposes. 1. Under chattel mortgage acts, the Uniform Conditional Sales Act, and other conditional sales legislation the geographical unit for filing or recording was local; the county or township in which the mortgagor or vendee resided or in which the goods sold or mortgaged were kept. The Uniform Trust Receipts Act used the state as the geographical filing unit; under that act statements of trust receipt financing were filed with an official in the state capital and were not filed locally. The
statewide filing system of the Trust Receipts Act has been followed in many accounts receivable and factor's lien acts.
  Both systems have their advocates and both their own advantages and drawbacks. The principal advantage of statewide 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 statewide 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. On the other hand, it can be said that most credit inquiries about local businesses, farmers, and consumers come from local sources; convenience is served by having the files locally available and there is not great advantage in centralized filing.
  This section does not attempt to resolve the controversy between the advocates of a completely centralized statewide filing system and those of a large degree of local autonomy. Instead the section is drafted in a series of alternatives; local considerations of policy will determine the choice to be made.
  2. Fortunately there is general agreement that the proper filing place for security interests in fixtures is in the office where a mortgage on the real estate concerned would be filed or recorded, and paragraph (1)(a) in the First Alternative and paragraph (1)(b) in the Second and Third Alternatives so provide. This provision follows the Uniform Conditional Sales Act. Note that there is no requirement for an additional filing with the chattel records.
  3. In states where it is felt wise to preserve local filing for transactions of essentially local interest, either the Second or Third Alternative of subsection (1) should be
adopted. Paragraph (1)(a) in both alternatives provides county (township, etc.) filing for consumer goods transactions and for agricultural transactions (farm equipment, farm products, farm accounts, and crops). Note that the subsection departs from Section 6 of the Uniform Conditional Sales Act and adopts instead the policy of many chattel mortgage acts in selecting the county of the debtor's residence, rather than the county where the goods are located, as the normal filing place. Where, however, the debtor is an out-of-state resident, the filing must of necessity be in the county where the goods are, and the subsection so provides. Though not expressly stated, it is evident that filing for an assignment of accounts arising from the sale of farm products by a farmer who is not a resident must be in the county where the debtor keeps his farm products. In the case of crops growing or to be grown, where the land is in one county and the debtor's residence in another, filing must be made in both counties. Neither this filing for crops in the county where the land is nor the requirements that the security agreement [Section 9-203(1)(a)] and the financing statement [Section 9-402(1) and (3)] contain a description of the real estate point to the conclusion that a financing statement for a security interest in crops must be filed in the real estate records. This article follows pre-code law which recognized such a financing as a chattel mortgage. The policy of the subsection is to require filing in the place or places where a creditor would normally look for information concerning interests created by the debtor.
  For some incorporated farmers, reference to residence is an anomaly. Therefore subsection (6) provides that the residence of an organization is its place of business, or its chief executive office if it has more than one
place of business. Compare Section 9-103(3), which reaches essentially the same concept as a definition of the "location" of a debtor.
  4. It is thought that sound policy requires a statewide filing system for all transactions except the essentially local ones covered in paragraph (1)(a) of the Second and Third Alternatives and land-related transactions covered in paragraph (1)(b) of the Second and Third Alternatives. Paragraph (1)(c) so provides in both alternatives, as does paragraph (1)(b) in the First Alternative. In a state which has adopted either the Second or Third Alternative, central filing would be required when the collateral was goods except consumer goods, farm equipment, or farm products (including crops), or was documents or chattel paper or was accounts or general intangibles, unless related to a farm. Note that the filing provisions of this article do not apply to instruments (see Section 9-304).
  If the Third Alternative subsection (1) is adopted, then local filing, in addition to the central filing, is required in all the cases stated in the preceding paragraph, with respect to any debtor whose places of business within the state are all within a single county (township, etc.) or a debtor who is not engaged in business. The last event test stated in Section 9-103(1)(b) and comment thereto applies to determine whether local filing is required under the present section, as well as to determine in which state filing is required.
  In states where the arguments for a completely centralized set of files (except for fixtures) prevail, the First Alternative subsection (1) should be adopted. That alternative provides for exclusive central filing of all security interests except those in fixtures.
  5. When a secured party has in good faith attempted to comply with the filing requirements but has not done so correctly, subsection (2)
makes his filing effective in so far as it was proper, and also makes it good for all collateral covered by the financing statement against any person who actually knows the contents of the improperly filed statement. The subsection rejects the occasional decisions that an improperly filed record is ineffective to give notice even to a person who knows of it. But if the Third Alternative subsection (1) is adopted, the requirements of paragraph (1)(c) are not complied with unless there is filing in both offices specified; filing in only one of two required places is not effective except as against one with actual knowledge of the contents of the defective financing statement.
  6. Subsection (3) deals with change of residence or place of business or the location or use of the goods after a proper filing has been made. The subsection is important only when local filing is required, and covers only changes between local filing units in the state. For changes of location between states see Section 9-103(1)(d).
  Subsection (3) is presented in alternative forms. Under the first no new filing is required in the county to which the collateral has been removed. Under alternative subsection (3) the original filing lapses four months after the change in location; this is basically the same rule that is applied by Section 9-103(1)(d) to the case of collateral brought into the state subject to a security interest which attached elsewhere.
  7. The usual filing rules do not apply well for a transmitting utility (defined in Section 9-105). Many pre-code 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. The code recreates and broadens these provisions by subsection (5) of this section, which provides
that for transmitting utilities the filing need only be in the office of the Secretary of State. The nature of the debtor will inform persons searching the record as to where to make a search.
  Cross references:
  Sections 9-302, 9-304, and 9-307(2).
  Point 2: Section 9-313.
  Point 6: Section 9-103(3).
  Point 7: Sections 9-402(5) and 9-403(6).
  Definitional cross references:
  "Account": Section 9-106.
  "Collateral": Section 9-105.
  "Consumer goods": Section 9-109.
  "Debtor": Section 9-105.
  "Equipment": Section 9-109.
  "Farm products": Section 9-109.
  "Financing statement": Section 9-402.
  "Fixture filing": Section 9-313.
  "Good faith": Section 1-201.
"Goods": Section9-105.
  "Knowledge": Section 1-201.
  "Person": Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
  "Signed": Section 1-201.
  "Transmitting utility": Section 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  South Carolina adopted Alternative 3 to Section 9-401(1) when the UCC was enacted in 1966. The filing system established in Alternative 2 has worked reasonably well and there is no reason to switch to one of the other alternatives. A new alternative to subsection (3), which would require a new filing within four months of removal of collateral from one county to another in South Carolina if perfection was originally achieved by local county filing, a requirement that is essentially the same as under the rules in Section 9-103 for
continued perfection of collateral coming into South Carolina from another state where it was originally perfected, is worthy of consideration, but query the utility of this proposal. The original version of subsection (3), adopted by South Carolina when the UCC was enacted in this State in 1966, does not require any additional filing even though the debtor's residence or place of business or the location of the collateral or its use changes. However, since very few of the types of collateral that are subject to local county filing are likely to be moved (the possible exceptions would be farm equipment, consumer goods that are subject to a nonpurchase money security interest, and some kinds of fixtures) and changes in the debtor's residence or place of business which might be affected by alternative subsection (3) would be rare, there does not seem to be any compelling reason to change the existing subsection (3).
  Other than the alternative to subsection (3), the changes incorporated into the 1972 Text are included in Section 9-401. The following is a summary of these changes:
  1. Since contract rights are eliminated as a separate type of collateral and are included in the definition of accounts in the 1972 Text (see the Reporter's Notes to Section 9-106), the term "contracts rights" is eliminated from subsection (1)(a) of this section with respect to collateral arising from the sale of farm products.
  2. The purpose of the additional language in subsection (1)(a) relating to crops "growing or to be grown" is to eliminate any doubt that a financing statement covering crops can perfect an underlying security interest in future as well as existing crops. Note that the 1972 Text continues to treat security interests in growing crops as interests in chattels (this is made explicit in the revised definition of the term "goods" in Section 9-105(b) of the 1972 Text) in
contrast to security interests in timber to be cut under a contract of sale or conveyance and minerals (see the next paragraph), which, like security interests in fixtures, are considered as interests in real property.
  3. The changes in subsection (1)(b) deal with several areas that have caused problems under the 1962 Text of the UCC:
    (a) timber to be cut under a contract of sale or a conveyance and minerals (including oil and gas) after extraction are for the first time classified as "goods" under Section 9-105(h) of the 1972 Text.
    (b) security interests in accounts resulting from the sale of minerals (including oil and gas) at the wellhead or minehead are treated the same as security interests in the underlying minerals for filing purposes regardless of where the sale creating the account arose.
    (c) security interests in timber, minerals (including oil and gas) and accounts resulting from the sale of minerals are for filing purposes treated the same as fixtures on the grounds that all these types of collateral are traditionally thought of as being interests in land and as a consequence liens on such types of collateral have traditionally been filed in the real estate rather than chattel records.
    (d) the intent is that the filings for these types of collateral should be indexed in the real estate mortgage records. The use of a separate index for such financing statements, a practice followed in some jurisdictions with respect to fixtures under the 1962 Text, is not appropriate. This intent is made explicit in Section 9-403(7) of the 1972 Text. See also Sections 9-402(3) and 9-402(5).
    (e) Special requirements for financing statements covering all these types of collateral are set forth in Section 9-402(5). As far as fixtures are concerned these special requirements are necessary only if a fixture
filing [Section 9-313(1)(b)] is desired in order to obtain priority over interests in the real estate on which the fixture is located. See the next paragraph. See also Section 9-402(5) and (6) and the Reporter's Notes to those sections.
    (f) As far as fixtures are concerned, the requirement for filing in the real estate records applies only if the priority advantages of Section 9-313 with respect to real estate interests, are desired. If the secured party is not concerned about priority against real estate parties, he can file for a fixture as for an ordinary chattel, omitting the filing in the real estate records, and he will have a security interest perfected against everyone but real estate parties. In the case of a purchase money security interest in consumer goods that are fixtures he need not file at all. See Section 9-313(1)(d). For the question of the effect of the regular chattel filing in lieu of fixture filing in the event of the debtor's bankruptcy, see Official Comment 4(c) to Section 9-313 of the 1972 Text.
  4. The change in the wording in subsection (4) which deals with the filing of financing statements in South Carolina for collateral brought into this State from another jurisdiction is nonsubstantive.
  5. Subsection (5) is new. It makes clear that a financing statement filed against a "transmitting utility" [Section 9-105(n) of the 1972 Text] need be filed only in the office of the Secretary of State and not locally. A special provision is needed for filings against utilities, because most of them own property in several counties and in many cases own property in more than one state. If the problem were only on nonfixtures, not more than one local filing would have been necessary, but the problem is more difficult in the case of fixtures, where the standard rule would require filing with real estate descriptions in every
county where fixtures were located, a requirement that is unduly burdensome. See also paragraph 2 of the South Carolina Reporter's Notes to Section 9-403.
  6. Subsection (6) is new. Its main application would be to determine the proper place of filing for an incorporated farm. The determination of the "residence" of such farms has caused some difficulties under the 1962 Text, which contained no similar provision.
  "Section 36-9-402. Formal requisites of financing statement; amendments; mortgage as financing statement.
  (1) A financing statement is sufficient if it gives the names of the debtor and the secured party, is signed by the debtor, gives an address of the secured party from which information concerning the security interest may be obtained, gives a mailing address of the debtor, and contains a statement indicating the types, or describing the items, of collateral. A financing statement may be filed before a security agreement is made or a security interest otherwise attaches. When the financing statement covers crops growing or to be grown, the statement shall also contain a description of the real estate concerned. When the financing statement covers timber to be cut or covers minerals or the like (including oil and gas) or accounts subject to subsection (5) of Section 36-9-103, or when the financing statement is filed as fixture filing (Section 36-9-313) and the collateral is goods which are or are to become fixtures, the statement shall also comply with subsection (5). A copy of the security agreement is sufficient as a financing statement if it contains the above information and is signed by the debtor. A carbon, photographic, or other reproduction of a security agreement or a financing statement is sufficient as a financing statement if the
security agreement so provides or if the original has been filed in this State.
  (2) A financing statement which otherwise complies with subsection (1) is sufficient when it is signed by the secured party instead of the debtor if it is filed to perfect a security interest in:
    (a) collateral already subject to a security interest in another jurisdiction when it is brought into this State, or when the debtor's location is changed to this State. The financing statement must state that the collateral was brought into this State under such circumstances; or
    (b) proceeds under Section 36-9-306 if the security interest in the original collateral was perfected. The financing statement must describe the original collateral; or
    (c) collateral as to which the filing has lapsed; or
    (d) collateral acquired after a change of name, identity, or corporate structure of the debtor (subsection (7)).
  (3) A form substantially as follows is sufficient to comply with subsection (1):
Name of debtor (or assignor)
Address
Name of secured party (or assignee)
Address
  1. This financing statement covers the following types (or items) of property:
(Describe)

  2. (If collateral is crops) The above described crops are growing or are to be grown on:
(Describe Real Estate)

  3. (If applicable) the above goods are to become fixtures on
(Describe Real Estate)

and this financing statement is to be filed in the real estate records. (If the debtor does not have an interest of record) The name of a record owner is
  In lieu of the language 'The above goods are to become fixtures on ___ '
contained above, the following language where appropriate may be substituted: 'The above timber is standing on _____________ '
or 'The above minerals or the like (including oil and gas) or accounts will be financed at the wellhead or minehead of the well or mine located on ______________________ '
  4. (If products of collateral are claimed) Products of the collateral are also covered.
(use whichever is applicable)

Signature of Debtor (or Assignor)

Signature of Secured Party (or Assignee).
  (4) A financing statement may be amended by filing a writing signed by both the debtor and the secured party. An amendment does not extend the period of effectiveness of a financing statement. If any amendment adds collateral, it is effective as to the added collateral only from the filing date of the amendment. In this chapter, unless the context otherwise requires, the term 'financing statement' means the original financing statement and any amendments.
  (5) A financing statement covering timber to be cut or covering minerals or the like (including oil and gas) or accounts subject to subsection (5) of Section 36-9-103, or a financing statement filed as a fixture filing (Section 36-9-313) where the debtor is not a transmitting utility, shall show that it covers this type of collateral, it shall recite that it
is to be filed in the real estate records, and the financing statement shall contain a description of the real estate. If the debtor does not have an interest of record in the real estate, the financing statement shall show the name of a record owner.
  (6) A mortgage is effective as a financing statement filed as a fixture filing from the date of its recording if:
    (a) the goods are described in the mortgage by item or type;
    (b) the goods are or are to become fixtures related to the real estate described in the mortgage;
    (c) the mortgage complies with the requirements for a financing statement in this section other than a recital that it is to be filed in the real estate records;
    (d) the mortgage is duly recorded.
No fee with reference to the financing statement is required other than the regular recording and satisfaction fees with respect to the mortgage.
  (7) A financing statement sufficiently shows the name of the debtor if it gives the individual, partnership, or corporate name of the
debtor, whether or not it adds other trade names or names of partners. Where the debtor so changes his name or in the case of an organization its name, identity, or corporate structure that a filed financing statement becomes seriously misleading, the filing is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the change, unless a new appropriate
financing statement is filed before the expiration of that time. 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.
  (8) A financing statement substantially complying with the requirements of this section
is effective even though it contains minor errors which are not seriously misleading."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Sections 13(3), 13(4), Uniform Trust Receipts Act.
  Purposes. 1. Subsection (1) sets out the simple formal requisites of a financing statement under this article. These requirements are: (1) signature of the debtor; (2) addresses of both parties; (3) a description of the collateral by type or item.
  Where the collateral is crops growing or to be grown or when the financing statement is filed as a fixture filing (Section 9-313) or when the collateral is timber to be cut or minerals or the like (including oil and gas) financed at wellhead or minehead or accounts resulting from the sale thereof, the financing statement must also contain a description of the lands concerned. On description generally, see Section 9-110 and Comment 5 to the present section. An important distinction must be drawn, however, between the function of the description of land in reference to crops and its function in the other cases mentioned. For crops it is merely part of the description of the crops concerned, and the security interest in crops is a code security interest, like the pre-code "crop mortgage" which was a chattel mortgage. In contrast, in the other cases mentioned the function of the description of land is to have the financing statement filed in the county where the land is situated and in the realty records, as distinguished from the chattel records. Subsection (3) suggests a form which complies with the statutory requirements and makes clear that for the types of collateral mentioned other than crops, the financing statement containing a description of the land concerned is to go in the realty records. Note
also subsection (5) on the adequacy of the description of land where the filing is to be in the real estate records. See also Section 9-403 (7) on the indexing of these filings in the real estate records.
  A copy of the security agreement may be filed in place of a separate financing statement, if it contains the required information and signature.
  2. This section adopts the system of "notice filing" which proved successful under the Uniform Trust Receipts Act. What is required to be filed is not, as under chattel mortgage and conditional sales acts, the security agreement itself, but only a simple notice which may be filed before the security interest attaches or thereafter. The notice itself indicates merely that the secured party who has filed may have a security interest in the collateral described. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs. Section 9-208 provides a statutory procedure under which the secured party, at the debtor's request, may be required to make disclosure. Notice filing has proved to be of great use in financing transactions involving inventory, accounts, and chattel paper, since it obviates the necessity of refiling on each of a series of transactions in a continuing arrangement where the collateral changes from day to day. Where other types of collateral are involved, the alternative procedure of filing a signed copy of the security agreement may prove to be the simplest solution. Sometimes more than one copy of a financing statement or of a security agreement used as a financing statement is needed for filing. In such a case the section permits use of a carbon copy or photographic copy of the paper, including signatures.
  However, even in the case of filings that do not necessarily involve a series of transactions
the 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 description of collateral in the financing statement is broad enough to encompass them. Similarly, the financing statement is valid to cover after-acquired property and future advances under security agreements whether or not mentioned in the financing statement.
  3. This section departs from the requirements of many pre-code chattel mortgage statutes that the instrument filed be acknowledged or witnessed or accompanied by affidavits of good faith. Those requirements did not seem to have been successful as a deterrent to fraud; their principal effect was to penalize good faith mortgagees who had inadvertently failed to comply with the statutory niceties. They are here abandoned in the interest of a simplified and workable filing system.
  4. Subsection (2) allows the secured party to file a financing statement signed only by himself where the filing is required by any of the events listed, each of which occurs after the commencement of the financing, and therefore under circumstances where the cooperation of the debtor is not certain. Section 9-401(3), alternative provision, contains similar permission on removal between counties in this state. The secured party should not be penalized for failure to make a timely filing by reason of difficulty in procuring the signature of a possible reluctant or hostile debtor. Financing statements filed under this subsection must explain the circumstances under which they are filed with the signature of the secured party rather than that of the debtor.
  In contrast to the signatures on original financing statements, an amendment to a financing statement must be signed by both
parties, to preclude either from adversely affecting the interests of the other.
  The reference in subsection (4) to an amendment which "adds collateral" refers to additional types of collateral. A security interest on additional units of a type of collateral already described can be created under an after-acquired property clause or a new security agreement. See Comment 5 to Section 9-204. On priorities in such cases see Section 9-312 and comments thereto.
  5. A description of real estate must be sufficient to identify it. See Section 9-110. This formulation rejects the view that the real estate description must be by metes and bounds, or otherwise conforming to traditional real estate 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 estate must be sufficient so that the fixture financing statement will fit into the real estate search system and the financing statement be found by a real estate searcher. Optional language has been added by which the test of adequacy of the description is whether it would be adequate in a mortgage of the real estate. As suggested in the note, more detail may be required if there is a tract indexing system or a land registration system.
  Where the debtor does not have an interest of record in the real estate, a fixture financing statement must show the name of a record owner, and Section 9-403(7) requires the financing statement to be indexed in the name of that owner. Thus the fixture financing statement will fit into the real estate search system.
  6. A real estate mortgage may provide that it constitutes a security agreement with respect to fixtures (or other goods) in conformity with
this article. Combined mortgages on real estate and chattels are common and useful for certain purposes. This section goes further and makes provision that the recording of the real estate mortgage (if it complies with the requirements of a financing statement) shall constitute the filing of a financing statement as to the fixtures (but not, of course, as to the other goods). Section 9-403(6) makes the usual five-year maximum life for financing statements inapplicable to real estate mortgages which operate as financing statements under Section 9-402(6), and they are effective for the duration of the real estate recording.
  Of course, if a combined mortgage covers chattels which are not fixtures, a regular chattel filing is necessary, and subsection (6) is inapplicable to such chattels. Likewise, filing as a "fixture filing" provided in Section 9-401 does not apply to true chattels.
  7. Subsection (7) undertakes to deal with some of the problems as to who is the debtor. In the case of individuals, it contemplates filing only in the individual name, not in a trade name. In the case of partnerships it contemplates filing in the partnership name, not in the names of any of the partners, and not in any other trade names. Trade names are deemed to be too uncertain and too likely not to be known to the secured party or person searching the record, to form the basis for a filing system. However, provision is made in Section 9-403(5) for indexing in a trade name if the secured party so desires.
  Subsection (7) also deals with the case of a change of name of a debtor and provides some guidelines when mergers or other changes of corporate structure of the debtor occur with the result that a filed financing statement might become seriously misleading. Not all cases can be imagined and covered by statutes in advance; however, the principle sought to be achieved by
the subsection is that after a change which would be seriously misleading, the old financing statement is not effective as to new collateral acquired more than four months after the change, unless a new appropriate financing statement is filed before the expiration of the four months. The old financing statement, if legally still valid under the circumstances, would continue to protect collateral acquired before the change and, if still operative under the particular circumstances, would also protect collateral acquired within the four months. Obviously, the subsection does not undertake to state whether the old security agreement continues to operate between the secured party and the party surviving the corporate change of the debtor.
  8. Subsection (7) also deals with a different problem, namely whether a new filing is necessary where the collateral has been transferred from one debtor to another. This question has been much debated both in pre-code law and under the code. This article now answers the question in the negative. Thus, any person searching the condition of the ownership of a debtor must make inquiry as to the debtor's source of title, and must search in the name of a former owner if circumstances seem to require it.
  9. Subsection (8) is in line with the policy of this article to simplify formal requisites and filing requirements and is designed to discourage the fanatical and impossibly refined reading of such statutory requirements in which courts have occasionally indulged themselves. As an example of the sort of reasoning which this subsection rejects, see General Motors Acceptance Corporation v. Haley, 329 Mass. 559, 109 N.E. 2d 143 (1952).
  Cross references:
  Point 1: Section 9-110.
  Point 2: Section 9-208.
  Point 4: Sections 9-103, 9-306, and 9-401(3).
  Point 5: Section 9-110.
  Point 6: Section 9-403(6).
  Point 7: Section 9-403(8).
  Point 8: Section 9-311.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Fixture": Section 9-313.
  "Fixture filing": Section 9-313.
  "Goods": Section 9-105.
  "Party": Section 1-201.
  "Proceeds": Section 9-306.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
  "Signed": Section 1-201.
  "Transmitting utility": Section 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  This section makes several desirable changes in the requirements for financing statements. These changes are summarized below:
  1. Subsection (1) has been changed to require only the signature of the debtor. The requirement in the 1962 Text of the secured party's signature on a financing statement has sometimes misled creditors, who are accustomed to pre-UCC practice under which only the debtor, not the secured party, need sign instruments such as chattel mortgages. Thus, when a security agreement was used as a financing statement, it might have been defective under the 1962 Text for failure to have the signature of the secured party. This change also fits in with the provisions of Section 9-403(6), under which a real estate mortgage (customarily signed only by the debtor) may be effective as a financing statement.
  2. An amended financing statement, however, must, as under the 1962 version of this section which was enacted by South Carolina in 1966, be
signed by both the debtor and the secured party. This is made explicit in the revised wording in subsection (4) of the 1972 Text.
  3. The number of situations in which only the secured party's signature on a financing statement is sufficient is expanded to include situations where the debtor's location is changed to this State, the original filing has lapsed, and there has been a change of name, identity, or corporate structure of the debtor under subsection (7). All of these cases involve situations where a valid original financing statement signed by the debtor was filed and the problems of obtaining the signature of the debtor on a new financing statement may be significant particularly if the debtor is uncooperative.
  4. There are new special requirements, set forth in subsections (5) and (6), covering fixtures, timber to be cut under a contract of sale or consequence, minerals (including oil and gas) and accounts arising from the sale of minerals and the like (see paragraph 3 of the Reporter's Notes to Section 9-401).
    (a) All such financing statements, except those involving debtors who are transmitting utilities (see paragraph 5 of the Reporter's Notes to Section 9-401), must contain a description of the real estate. As Official Comment 5 to the 1972 Text indicates, the description is sufficient if it will enable a person searching the real estate records to identify the property. In most situations a street address or plat book reference would suffice to meet this test. An alternative requirement in subsection (5) of the 1972 Text requiring the description to be "sufficient if it were contained in a mortgage of the real estate to give constructive notice of the mortgage under the law of this State" was not included. A large amount of "fixture financing" is done by retail stores selling items to
consumers. Given the uncertainty as to what constitutes a fixture and the consequent necessity of filing as a fixture filing in cases of doubt, the requirement of a full legal metes and bounds description would unduly add to the expense of such financing. The requirement that all such financing statements be indexed in the name of the owner of the property coupled with the requirement that the description be sufficient for a title searcher to identify the property, provides adequate protection for persons with interests in the real property in question. Finally, the requirement of a "legal description" is contrary to existing South Carolina cases which in essence have consistently upheld land descriptions in deeds and mortgages if the description is sufficient to enable a person of ordinary prudence to identify the property by means of reasonable inquiries suggested by the description. See e.g., Brownlee v. Miller, 208 S.C. 252, 37 S.E. 2d 658 (1946) (deed); People's Bank of Rock Hill v. People's Bank of Anderson, 122 S.C. 476, 115 S.E. 736 (1922) (crop mortgage); Livingston v. Seaboard Air Line Ry. Co., 100 S.C. 18, 84 S.E. 303 (1915) (crop mortgage).
    (b) All such financing statements must indicate that they cover the type of collateral in question, state that the financing statement is to be filed for record in the real estate records, and in the event the debtor is not the record owner of the property, must specify the record owner. These requirements are also included in the model form of a financing statement set forth in subsection (3) of this section. In this connection, Section 9-403(7) of the 1972 Text requires that all such financing statements will be indexed in the name of the debtor and the owner of record in the mortgage records. Thus all such filing will be in the chain of title of the owner of the property. These provisions clear up a
legitimate complaint by real estate lawyers that the 1962 Text does not require that a record of security interests in fixtures and similar items that have traditionally been thought of as interests in real estate be indexed in the real estate mortgage records where they would be disclosed in a normal title search.
    (c) Under subsection (6) a properly executed and recorded real estate mortgage can serve as a fixture filing if it meets the requirements set forth in this subsection which would normally be the case. See, however, Official Comment 6 to the 1972 Text for an explanation of the ineffectiveness of a real estate mortgage to perfect a security interest in items that are not fixtures.
  5. Subsection (7) makes it clear that the name of the debtor for financing statement and filing purposes is the individual owner in the case of a proprietorship, or the name of a partnership or a corporation, and not the trade name of the business. This avoids the necessity of dual filing in trade name situations; however, a second filing for an additional fee under the trade name is authorized under Section 9-403(5) of the 1972 Text.
  6. Subsection (7) also deals with the troublesome problem of the continued effectiveness of a financing statement after a change of name or corporate structure, such as a merger. The financing statement is effective as to all existing and future collateral covered by the financing statement except that where the name or other change makes the existing financing statement "seriously misleading", in which case a new financial statement with the new name, etc., of the debtor must be filed to perfect a security interest in collateral acquired by the debtor more than four months after the change. However, as to existing collateral and additional collateral obtained within four months of the change, the original
financing statement is effective even if the name or other change makes the original financing statement seriously misleading. Subsection (7) also makes it clear that a financing statement remains effective if the property is transferred by the debtor to a third party even if the secured party knows or consents to the transfer. The effect of these salutory changes is to place a burden on a creditor of a debtor to inquire as to prior ownership of potential collateral and to make a record search under the prior owner's name, if that is deemed appropriate, a burden that is reasonable and one that most secured parties have probably assumed they had.
  On the other hand, the burden on the original secured party to file a new financing statement to cover new collateral acquired more than four months after the change if the name or other change would be seriously misleading to a potential new secured party of the debtor, is also reasonable. Four months is a sufficiently long period of time for the original secured party to discover the change and the fact that it might be seriously misleading. There may be some problems in determining when the original financing statement is seriously misleading but this problem can be overcome by the simple expedient of filing a second financing statement in the new name if there is any doubt.
  7. Finally, subsection (1) allows a copy or reproduction of a signed financing statement or security agreement to be filed where the security agreement authorizes such a filing or the original has already been filed. This provision will cut down on the number of cases where multiple original financing statements will have to be executed and also overrules the practice of some filing officers who refuse to accept copies of financing statements for filing under any circumstances.
  "Section 36-9-403. What constitutes filing; duration of filing; effect of lapsed filing; duties of filing officer.
  (1) Presentation for filing of a financing statement and tender of the filing fee or acceptance of the statement by the filing officer constitutes filing under this chapter.
  (2) Except as provided in subsection (6) a filed financing statement is effective for a period of five years from the date of filing. The effectiveness of a filed financing statement lapses on the expiration of the five-year period unless a continuation statement is filed prior to the lapse. If a security interest perfected by filing exists at the time insolvency proceedings are commenced by or against the debtor, the security interest remains perfected until termination of the insolvency proceedings and thereafter for a period of sixty days or until expiration of the five-year period, whichever occurs later. Upon lapse the security interest becomes unperfected, unless it is perfected without filing. If the security interest becomes unperfected upon lapse, it is considered to have been unperfected as against a person who became a purchaser or lien creditor before lapse.
  (3) A continuation statement may be filed by the secured party within six months prior to the expiration of the five-year period specified in subsection (2). Any continuation statement must be signed by the secured party, identify the original statement by file number, and state that the original statement is still effective. A continuation statement signed by a person other than the secured party of record must be accompanied by a separate written statement of assignment signed by the secured party of record and complying with subsection (2) of Section 36-9-405, including payment of the required fee. Upon timely filing of the continuation statement, the effectiveness of the original
statement is continued for five years after the last date to which the filing was effective whereupon it lapses in the same manner as provided in subsection (2) unless another continuation statement is filed prior to the lapse. Succeeding continuation statements may be filed in the same manner to continue the effectiveness of the original statement. Unless a statute on disposition of public records provides otherwise, the filing officer may remove a lapsed statement from the files and destroy it immediately if he has retained a microfilm or other photographic record, or in other cases after one year after the lapse. The filing officer shall so arrange matters by physical annexation of financing statements to continuation statements or other related filings, or by other means, that if he physically destroys the financing statements of a period more than five years past, those which have been continued by a continuation statement or which are still effective under subsection (6) are retained.
  (4) Except as provided in subsection (7) a filing officer shall mark each statement with a file number and with the date and hour of filing and shall hold the statement or a microfilm or other photographic copy of the statement for public inspection. In addition the filing officer shall index the statements according to the name of the debtor and shall note in the index the file number and the address of the debtor given in the statement.
  (5) The uniform fee for filing and indexing and for stamping a copy furnished by the secured party to show the date and place of filing for an original financing statement or for a continuation statement is eight dollars if the statement is in the standard form prescribed by the Secretary of State and otherwise is ten dollars, plus in each case, if the financing statement is subject to subsection (5) of
Section 36-9-402, two dollars. The uniform fee for each name more than one required to be indexed is two dollars. The secured party may at his option show a trade name for any person and an extra uniform indexing fee of two dollars must be paid with respect thereto.
  (6) If the debtor is a transmitting utility (subsection (5) of Section 36-9-401) and a filed financing statement so states, it is effective until a termination statement is filed. A real estate mortgage which is effective as a fixture filing under subsection (6) of Section 36-9-402 remains effective as a fixture filing until the mortgage is released or satisfied of record or its effectiveness otherwise terminates as to the real estate.
  (7) When a financing statement covers timber to be cut or covers minerals or the like (including oil and gas) or accounts subject to subsection (5) of Section 36-9-103, or is filed as a fixture filing, the filing officer shall index it under the names of the debtor and any owner or record shown on the financing statement in the same fashion as if they were the mortgagors in a mortgage of the real estate described, and, to the extent that the law of this State provides for indexing of mortgages under the name of the mortgagee, under the name of the secured party as if he were the mortgagee thereunder, or where indexing is by description in the same fashion as if the financing statement were a mortgage of the real estate described."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Sections 13(3), 13(4), Uniform Trust Receipts Act; Section 10, Uniform Conditional Sales Act.
  Purposes. 1. Prior law was not always clear whether a mortgage filed for record gave constructive notice from the time of
presentation to the filing officer or only from the time of indexing. Subsection (1) adopts the former position.
  2. Prior statutes have usually limited the effectiveness of a filing to a specified period of time after which refiling is necessary. Subsection (2) follows the same policy, establishing five years as the filing period, with an exception for the cases mentioned in subsection (6). Subsection (3) provides for the filing of one or more continuation statements (which need be signed only by the secured party) if it is desired to continue the effectiveness of the original filing.
  The theory of this article is that the public files of financing statements are self-clearing, because the filing officer may automatically discard each financing statement after a period of five years plus the year after lapse required by subsection (3), unless a continuation statement is filed, or the financing statement is still effective under subsection (6). This theory materially lessens the tension that would otherwise exist to have the files cleared by termination statements under Section 9-404. Similarly, a person searching the files need not go back past this five years plus one year; and if the indices are arranged by years, he has a limited and defined search problem. The section asks the filing officer to attach financing statements whose life has been continued by continuation statements to the latter statements, so that anything contained in the files of old years can be discarded.
  Subsection (6) provides certain special filing rules, namely, filings against transmitting utilities (Section 9-105), for which financing statements are filed in the office of the Secretary of State; and real estate mortgages which serve as fixture financing statements and which are filed in the real estate records. In both of these cases the financing statement is
valid for the life of the obligations secured. No confusion as to the required scope of search should result, because of the special nature of the filings involved.
  3. Under subsection (2) the security interest becomes unperfected when filing lapses. Thereafter, the interest of the secured party is subject to defeat by purchasers and lienors even though before lapse the conflicting interest may have been junior. Compare the situation arising under Section 9-103(1)(d) when a perfected security interest under the law of another jurisdiction is not perfected in this state within four months after the property is brought into this state.
  Thus if A and B both make nonpurchase money advances against the same collateral, and both perfect security interests by filing, A who files first is entitled to priority under Section 9-312(5). But if no continuation statement is filed, A's filing may lapse first. So long as B's interest remains perfected thereafter, he is entitled to priority over A's unperfected interest. This rule avoids the circular priority which arose under some prior statutes, under which A was subordinate to the debtor's trustee in bankruptcy, A retained priority over B, and B's interest was valid against the trustee in bankruptcy. In re Andrews, 172 F. 2d 996 (7th Cir. 1949).
  4. Subsection (7) makes clear that the filings in real estate records [Sections 9-401 and 9-402(3) and (5)] shall be indexed in the real estate records, where they will be found by a real estate searcher. Where the debtor is not an owner of record, the financing statement must show the name of an owner of record, and the statement is to be indexed in his name. See Sections 9-313(4)(b) and (c), 9-402(3), 9-402(5).
  Cross references:
  Point 3: Sections 9-103(3), 9-301, and
9-312(5).
  Point 4: Sections 9-313(4)(b) and (c),
9-401(1), 9-402(3) and (5), and 9-405(2).
  Definitional cross references:
  "Debtor": Section 9-105.
  "Financing statement": Section 9-402.
  "Fixture": Section 9-313.
  "Fixture filing": Section 9-313.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
  "Transmitting utility": Section 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  The changes made in this section, which are summarized below, clarify several problem areas that have existed under the 1962 Text and implement many of the changes made in other provisions of Part 4.
  1. The change in subsection (2) and corresponding changes in subsection (3) make every financing statement [except those described in subsection (6)] effective for a full five years, thus changing the rule of the 1962 Text presently effective in South Carolina that a financing statement which showed a maturity of less than five years was effective only for the period until maturity plus sixty days. This limitation could have been easily evaded simply by not showing a maturity, even though there was one. The change facilitates renewals or extensions up to a maximum combined duration of five years, without the danger of the financing statement ceasing to be effective. Note, however, that even though a filed financing statement is automatically effective for five years, this would not have the effect of extending or otherwise altering the maturity of the underlying security agreement.
  2. New subsection (6) deals with transmitting utilities [see Sections 9-105 and 9-401(5)] and also with real estate mortgages which are
effective as financing statements under Section 9-402(6). In these special cases a financing statement is not limited to five years. The filing in real estate records of a financing statement which is also a real estate mortgage will give notice to persons searching the record as to this continuing validity and will not interfere with the purpose of the UCC's standard rule of five-year validity for financing statements. The name of a transmitting utility should give equivalent notice in filings against that kind of company. In 1968, the South Carolina General Assembly adopted an amendment to Section 9-403(3) which validated financing statements filed against rural electric cooperatives and public utilities subject to the jurisdiction of the South Carolina Public Service Commission until a termination statement was filed. See Section 36-9-403(3) of the 1976 South Carolina Code. The language in the 1972 Official Text covers all transmitting utilities. In addition, the 1972 Text would only require one filing in the Secretary of State's office whereas the Text of the UCC adopted by South Carolina would require local county filing if fixtures were involved. See Section 9-401(5) of the 1972 Text and the Reporter's Notes to that section. For these reasons the treatment of security interests against public utilities under the 1972 Text is more comprehensive and less complicated than under the existing South Carolina UCC. In this connection, the wording of Section 9-302(3)(b) of the UCC adopted in South Carolina [Section 36-9-302(3)(b) of the 1976 South Carolina Code] exempts security interests of railroads from the filing requirements of Article 9 in favor of continuing the preexisting filing system for such security interests under Section 30-11-20 of the 1976 South Carolina Code. The new rules for filing security interests against transmitting utilities in the 1972 Text apply to
railroads, and the existing filing exemption in Section 36-9-302(3)(b) is eliminated.
  3. New subsection (7) deals with a point in reference to fixtures on which the 1962 Text was properly subject to criticism, namely, that it was not explicitly stated that the fixture filing in the county where a real estate mortgage would be recorded was intended to be made and be indexed in the real estate records. This principle is now stated and is also made applicable to timber to be cut and to minerals and the like (including oil and gas) financed at the wellhead or minehead or accounts resulting from the sale thereof. See also paragraph 4 of the Reporter's Notes to Section 9-402.
  4. In addition to making all financing statements automatically effective for five years, subsection (2) makes two other important changes.
    (a) The first deals with cases in which the five-year period for effectiveness expires during insolvency proceedings. While the prevailing line of decisions is to the effect that the situation is frozen at the moment of bankruptcy without an obligation to refile, there are contrary decisions, and this situation might prove an inadvertent trap to a secured party who failed to refile or file a continuation statement during a bankruptcy. The change continues the validity of the financing statement until the end of the insolvency proceedings and for sixty days thereafter, or until the expiration of the five-year period, whichever is later. Ordinarily, if the secured party expects that the secured debt may continue in existence after the end of the insolvency proceedings, he should file a continuation statement on the normal schedule, to preserve the filing for use at the end of the insolvency proceeding and to preclude any discontinuity of the filings.
    (b) The second makes it clear that if a financing statement lapses before a proper continuation statement is filed or the security interest is perfected other than by filing, then any lien creditor or purchaser who obtained an interest in the property before the lapse date would have priority over the secured party with the lapsed security interest. As is pointed out in Official Comment 3, this new language avoids a possible circular priority problem that could arise under the 1962 Text in the event of the debtor's bankruptcy.
  5. The additional sentence in subsection (3) with respect to continuation statements makes it clear that in situations where the assignee of a security interest is not the secured party of record a UCC-3 form signed by the secured party of record must be filed at the time the assignee files a continuation statement. This will enable anyone checking for filings against a debtor to trace the history of a security interest and ties into the record-clearing provisions discussed in the next paragraph.
  6. Additional language in subsection (3) mandates self-clearing procedures for all lapsed financing statements. In the absence of such procedures, not only would the problems of storage and retrieval of financing statements increase, but the cost of searches would be unnecessarily increased. The procedures for filing termination statements under Section 9-404, which was the only clearing device incorporated into the 1962 Text, proved to be inadequate since the filing of termination statements was required only on written demand of the debtor. In cases where continuation statements have been filed, the original financing statement would be attached to the continuation statement under the 1972 Text and would therefore not be destroyed in the self-clearing of lapsed financing statements. See also Section 9-404(2) of the 1972 Text.
  7. The changes in subsection (5) with respect to filing fees authorize a greater variety of different fees for filing and indexing financing and continuation statements than does the 1966 UCC. Additional fees are authorized for dual filing, as authorized by this subsection, and for other types of filings [see Sections 9-404(3), 9-405(1) and (2), 9-406, and 9-407(2)] because of the extra costs involved in handling such filings.
  "Section 36-9-404. Termination statement.
  (1) Whenever a secured party collects in advance from the debtor a fee for filing a termination statement in connection with a transaction in which on or after the effective date of the 'Consumer Protection Code Revision Act of 1982' the secured party files a financing statement covering consumer goods, then within one month or within ten days following written demand by the debtor after there is no outstanding secured obligation and no commitment to make advances, incur obligations or otherwise give value, the secured party shall file with each filing officer with whom the financing statement was filed, a termination statement to the effect that he no longer claims a security interest under the financing statement, which must be identified by file number. In other cases, whenever there is no outstanding secured obligation and no commitment to make advances, incur obligations or otherwise give value, the secured party shall, on written demand by the debtor, send the debtor, for each filing officer with whom the financing statement was filed, a termination statement to the effect that he no longer claims a secured interest under the financing statement, which must be identified by file number. A termination statement signed by a person other than the secured party of record must be accompanied by a separate written statement of assignment signed by the secured
party of record complying with subsection (2) of Section 36-9-405, including payment of the required fee. If the affected secured party fails to file a termination statement as required by this subsection, or to send a termination statement within ten days after proper demand for the termination statement he is liable to the debtor for one hundred dollars and, in addition, for any loss caused to the debtor by the failure.
  (2) On presentation to the filing officer of a termination statement he must note it in the index. If he has received the termination statement in duplicate, he shall return one copy of the termination statement to the secured party stamped to show the time of receipt of the termination statement. If the filing officer has a microfilm or other photographic record of the financing statement, and of any related continuation statement, statement of assignment, and statement of release, he may remove the originals from the files at any time after receipt of the termination statement, or if he has no such record, he may remove them from the files at any time after one year after receipt of the termination statement.
  (3) If the termination statement is in the standard form prescribed by the Secretary of State, the uniform fee for filing and indexing the termination statement is eight dollars, and otherwise is ten dollars, plus in each case an additional fee of two dollars for each name more than one against which the termination statement is required to be indexed."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 12, Uniform Conditional Sales Act.
  Purposes. 1. To provide a procedure for noting discharge of the secured obligation on
the records and for noting that a financing arrangement has been terminated.
  Since most financing statements expire in five years unless a continuation statement is filed (Section 9-403), 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 of clearing the situation as it appears on file, 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 [Section 9-302(1)(d)]; and in the case of motor vehicles a certificate of title law may control instead of the provisions of Article 9.
  2. This section adds to the usual provisions, one covering the problem which arises because a secured party under a notice filing system may file notice of an intention to make advances which may never be made. Under this section a debtor may require a secured party to send a termination statement when there is no outstanding obligation and no commitment to make future advances.
  Cross reference:
  Point 2: Section 9-402(1).
  Definitional cross references:
  "Consumer goods": Section 9-109.
  "Debtor": Section 9-105.
  "Financing statement": Section 9-402.
  "Person": Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
  "Send": Section 1-201.
  "Value": Section 1-201.
  "Written": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  Additional language in subsection (1) of the 1972 Text requiring the filing of termination statements in the case of financing statements covering consumer goods within thirty days after the debt is paid in full was not included in this act on the recommendation of the South Carolina Judicial Council and the South Carolina Bar. Therefore, the second paragraph of Official Comment is nonapplicable. The rationale for not following the Official Text was the fear that creditors would inadvertently fail to file the required termination statement, thereby being subjected to a suit for a one hundred dollar fine plus damages. A second reason is that apparently very few creditors currently collect a fee for the termination statement from the debtor, but if a mandatory termination statement requirement were imposed, the cost would be passed on to debtors with no real benefit to them. If a creditor does collect a termination statement fee from the debtor, however, then the creditor must file a termination statement within one month after the debt is repaid, or within ten days after the debtor requests that it be filed if the request is made within the one month time period. Failure to file within the designated time will result in an automatic one hundred dollar fine in addition to any provable damages. This filing requirement was enacted as Section 57(2)(e) of Act 385 of 1982.
  2. The remaining changes in this section implement changes in Section 9-403 and other sections of the 1972 Text designed to facilitate record-clearing and record-searching procedures. For example, the new language in subsection (1) relating to filing a UCC-3 form showing an assignment corresponds to changes in Sections 9-403(3) and 9-405 with respect to continuation statements.
  3. See paragraph 7 of the Reporter's Notes to Section 9-403 for a discussion of the fees authorized by this section.
  "Section 36-9-405. Assignment of security interest; duties of filing officer; fees.
  (1) A financing statement may disclose an assignment of a security interest in the collateral described in the financing statement by indication in the financing statement of the name and address of the assignee or by an assignment itself or a copy of the assignment on the face or back of the statement. On presentation to the filing officer of the financing statement, the filing officer shall mark the financing statement as provided in Section 36-9-403(4). The uniform fee for filing, indexing, and furnishing filing data for a financing statement so indicating an assignment is eight dollars if the statement is in the standard form prescribed by the Secretary of State and otherwise is ten dollars, plus in each case an additional fee of two dollars for each name more than one against which the financing statement is required to be indexed.
  (2) A secured party of record may assign all or part of his rights under a financing statement by the filing in the place where the original financing statement was filed of a separate written statement of assignment signed by the secured party of record and setting forth the name of the secured party of record and the debtor, the file number, and the date of filing of the financing statement and the name and address of the assignee and containing a description of the collateral assigned. A copy of the assignment is sufficient as a separate statement if it complies with the preceding sentence. On presentation to the filing officer of a separate statement, the filing officer shall mark the separate statement with the date and hour of the filing. He shall note the
assignment on the index of the financing statement, or in the case of a fixture filing, or a filing covering timber to be cut, or covering minerals or the like (including oil and gas) or accounts subject to subsection (5) of Section 36-98-103, he shall index the assignment under the name of the assignor as grantor and, to the extent that the law of this State provides for indexing the assignment of a mortgage under the name of the assignee, he shall index the assignment of the financing statement under the name of the assignee. The uniform fee for filing, indexing, and furnishing filing data about a separate statement of assignment is eight dollars if the statement is in the standard form prescribed by the Secretary of State and otherwise is ten dollars, plus in each case an additional fee of two dollars for each name more than one against which the statement of assignment is required to be indexed. Notwithstanding the provisions of this subsection, an assignment of record of a security interest in a fixture contained in a mortgage effective as a fixture filing [subsection (6) of Section 36-9-402] may be made only by an assignment of the mortgage in the manner provided by the law of this State other than this title.
  (3) After the disclosure or filing of an assignment under this section, the assignee is the secured party of record."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. This section provides a permissive device whereby a secured party who has assigned all or part of his interest may have the assignment noted of record. Note that under Section 9-302(2) no filing of such an assignment is required as a condition of continuing the perfected status of the security interest
against creditors and transferees of the original debtor. A secured party who has assigned his interest might wish to have the fact noted of record, so that inquiries concerning the transaction would be addressed not to him but to the assignee (see Point 2 of comment to Section 9-402). After a secured party has assigned his rights of record, the assignee becomes the "secured party of record" and may file a continuation statement under Section 9-403, a termination statement under Section 9-404, or a statement of release under Section 9-406.
  Where a mortgage of real estate is effective as a financing statement filed as a fixture filing [Section 9-402(6)], then an assignment of record of the security interest may be made only in the manner in which an assignment of the mortgage may be made under the local state law.
  Cross references:
  Sections 9-302(2) and 9-402 through 9-406.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Financing statement": Section 9-402.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Signed": Section 1-201.
  "Written": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  Essentially the changes in this section implement changes made in other sections. Under Section 9-302(2) the priority of an assignee of a perfected security interest against claims of creditors of the debtor is automatically the same as that of the assignor and therefore no filing is required as far as protection against the debtor's creditors is concerned. However, for record search purposes and protection of the secured party of record, it is necessary that
some official notice of the assignment signed by the secured party of record be filed at or prior to the time of a continuation statement [see Section 9-403(3)], termination statement [see Section 9-404(1)] or notice of release of collateral (Section 9-406) is filed. Note that if the assignment is shown on the original UCC-1 filing, the assignor must sign as the secured party under the 1972 Text of the UCC in order for the assignment to be proper. Under the 1962 Text presently enacted in South Carolina, the UCC-1 form could be signed by either the assignor or assignee.
  The remaining changes in this section indicate the proper places for filing any notice of assignment and establish the filing fees for such filings. On the latter point see paragraph 7 of the Reporter's Notes to Section 9-403.
  "Section 36-9-406. Release of collateral; duties of filing officer; fees.
  A secured party of record may by his signed statement release all or a part of any collateral described in a filed financing statement. The statement of release is sufficient if it contains a description of the collateral being released, the name and address of the debtor, the name and address of the secured party, and the file number of the financing statement. A statement of release signed by a person other than the secured party of record must be accompanied by a separate written statement of assignment signed by the secured party of record and complying with subsection (2) of Section 36-9-405, including payment of the required fee. Upon presentation of a statement of release to the filing officer he shall mark the statement with the hour and date of filing and shall note the same upon the margin of the index of the filing of the financing statement. The uniform fee for filing and noting a statement of release is eight
dollars if the statement is in the standard form prescribed by the Secretary of State and otherwise is ten dollars, plus in each case an additional fee of two dollars for each name more than one against which the statement of release is required to be indexed."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. Like the preceding section, this section provides a permissive device for noting of record any release of collateral. There is no requirement that such a statement be filed when collateral is released (cf. Section 9-404 on Termination Statements). It is merely a method of making the record reflect the true state of affairs so that fewer inquiries will have to be made by persons who consult the files.
  If the statement of release is not signed by the secured party of record, the assignment procedure of Section 9-405(2) must be followed.
  Cross reference:
  Section 9-404.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Financing statement": Section 9-402.
  "Secured party": Section 9-105.
  "Signed": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  This section provides for a voluntary filing of a release of collateral. Although the UCC does not require a release of collateral when the secured party in fact has a security interest in less collateral than is shown in the financing statement, the debtor is protected by the rule in Section 9-203, which limits the maximum security interest the secured party can claim to the amount described in the security
agreement; and the debtor's right under Section 9-208 to a list of the collateral claimed by the secured party.
  The additional language in this section with respect to required filings in the case of assignments conforms to changes in other sections of the 1972 Text. See Sections 9-403(3), 9-404(1), and 9-405.
  With respect to the proposed changes in the filing fees see paragraph (7) of the Reporter's Notes to Section 9-403.
  "Section 36-9-407. Information from filing officer.
  (1) If the person filing any financing statement, termination statement, statement of assignment, or statement of release, furnishes the filing officer a copy of the statement, the filing officer shall upon request note upon the copy the file number and date and hour of the filing of the original and deliver or send the copy to the person.
  (2) Upon request of any person, the filing officer shall issue his certificate showing whether there is on file on the date and hour stated in the certificate, any presently effective financing statement naming a particular debtor and any statement of assignment thereof and if there is, giving the date and hour of filing of each statement and the names and addresses of each secured party in the statement. The uniform fee for the certificate is five dollars if the request for the certificate is in the standard form prescribed by the Secretary of State and otherwise is eight dollars plus one dollar for each financing statement and for each statement of assignment reported therein. Upon request the filing officer shall furnish a copy of any filed financing statement or statement of assignment for a uniform fee of one dollar per page plus two dollars for certifying the copy."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. Subsection (1) requires the filing officer upon request to return to the secured party a copy of the financing statement on which the material data concerning the filing are noted. Receipt of such a copy will assure the secured party that the mechanics of filing have been complied with. Note, however, that under Section 9-403(1) the secured party does not bear the risk that the filing officer will not properly perform his duties; under that section the secured party has complied with the filing requirements when he presents his financing statement for filing and the filing fee has been tendered or the statement accepted by the filing officer.
  2. Subsection (2) requires the filing officer on request to issue to any person who has tendered the proper fee his certificate as to what filings have been made against any particular debtor and to furnish copies of such filed financing statements. In view of the centralized filing system adopted by this article (see Section 9-401 and comment thereto), this provision is of obvious convenience to a person who wishes to know what the files contain but who cannot conveniently consult files located in the state capital.
  Cross references:
  Point 1: Section 9-403(1).
  Point 2: Section 9-401.
  Definitional cross references:
  "Debtor": Section 9-105.
  "Financing statement": Section 9-402.
  "Person": Section 1-201.
  "Secured party": Section 9-105.
  "Send": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The only change in this section relates to the appropriate filing fees where a nonstandard form request is made. See paragraph 7 of the Reporter's Notes to Section 9-403. The two dollar certification fee is not included in the 1966 or 1972 Uniform Act Official Texts.
  "Section 36-9-408. Financing statements covering consigned or leased goods.
  A consignor or lessor of goods may file a financing statement using the terms 'consignor', 'consignee', 'lessor', 'lessee' or the like instead of the terms specified in Section 36-9-402. The provisions of this part shall apply as appropriate to the financing statement but its filing must not of itself be a factor in determining whether or not the consignment or lease is intended as security [Section 36-1-201(37)]. However, if it is determined for other reasons that the consignment or lease is so intended, a security interest of the consignor or lessor which attaches to the consigned or leased goods is perfected by filing."
OFFICIAL COMMENT
  Prior Uniform Statutory Provisions: None.
  Purposes. 1. Where filing is required under Sections 2-326(3) and 9-114 for a consignment which is not a security interest [Section 1-201(37)], this section authorizes the appropriate adaptations of terminology.
  Apart from the rules in Part 4, the rules of this article using the terms "debtor" and "secured party" will not apply to consignments if they are not security interests. Section 9-114 on consignments essentially parallels Section 9-312(3) on inventory priorities, and the latter rule therefore does not apply to
consignments. Section 2-326 states the rights of creditors of a consignee who has not filed or otherwise complied with subsection (3), and Section 9-301 on unperfected security interests is therefore not applicable. Section 2-326 and the law of consignments supply rules which are provided by Section 9-311 for security interests and that section is therefore not applicable to consignments. For reasons indicated in the comment to Section 9-114, Section 9-306 on proceeds is inapplicable to consignments. An equivalent to the protection of a buyer in ordinary course of business against a security interest under Section 9-307(1) is provided against consignments by Section 2-403(2) and (3).
  2. If a lease is actually intended as security [Section 1-201(37)], this article applies in full. But this question of intention is a doubtful one, and the lessor may choose to file for safety even while contending that the lease is a true lease for which no filing is required. This section authorizes filing with appropriate changes of terminology, and without affecting the substantive question of classification of the lease. If the lease is a true lease, none of the provisions of the article is applicable to the lease as an interest in the chattel. Note, however, that the article may be applicable to the lease in its aspect as chattel paper. See Section 9-105(b).
SOUTH CAROLINA REPORTER'S NOTES
  This section authorizes a special type of filing in situations involving consignments and leases of personal property. The special designations for the secured party and debtor avoid any possibility that the mere filing of a financing statement pursuant to this section would operate as an admission that a security interest was being claimed by the consignor or
lessor. Additionally, this section protects the priority rights of a consignor or lessor that has utilized the special designations in the event a court were to determine that the transaction in question created a security interest.
  Section 27-23-80 of the 1976 South Carolina Code requires that true consignments and leases must be filed of record in order to be valid against subsequent creditors. This code section is repealed by this act. See Section 9(a)(4) of this act and the Reporter's Notes to that section for a detailed explanation of the legal problems caused by Section 27-23-80. With the repeal of Section 27-23-80, filing as to true leases and consignment is no longer mandatory. Filing a financing statement pursuant to this section would, however, be advisable in any case where there is any substantial possibility that the transaction might be held to be a security interest rather than true lease or consignment.
"Part 5
Default
  Section 36-9-501. Default; procedure when security agreement covers both real and personal property.
  (1) When a debtor is in default under a security agreement, a secured party has the rights and remedies provided in this part and except as limited by subsection (3) those provided in the security agreement. He may reduce his claim to judgment, foreclose, or otherwise enforce the security interest by any available judicial procedure. If the collateral is documents the secured party may proceed either as to the documents or as to the goods covered by the documents. A secured party in possession has the rights, remedies, and duties provided in Section 36-9-207. The rights and
remedies referred to in this subsection are cumulative.
  (2) After default, the debtor has the rights and remedies provided in this part, those provided in the security agreement, and those provided in Section 36-9-207.
  (3) To the extent that they give rights to the debtor and impose duties on the secured party, the rules stated in the subsections referred to below may not be waived or varied except as provided with respect to compulsory, disposition of collateral [subsection (3) of Section 36-9-504 and Section 36-9-505] and with respect to redemption of collateral (Section 36-9-506) but the parties may by agreement determine the standards by which the fulfillment of these rights and duties is to be measured if the standards are not manifestly unreasonable:
    (a) subsection (2) of Section 36-9-502 and subsection (2) of Section 36-9-504 insofar as they require accounting for surplus proceeds of collateral;
    (b) subsection (3) of Section 36-9-504 and subsection (1) of Section 36-9-505 which deal with disposition of collateral;
    (c) subsection (2) of Section 36-9-505 which deals with acceptance of collateral as discharge of obligation;
    (d) Section 36-9-506 which deals with redemption of collateral;
    (e) subsection (1) of Section 36-9-507 which deals with the secured party's liability for failure to comply with this part.
  (4) If the security agreement covers both real and personal property, the secured party may proceed under this part as to the personal property or he may proceed as to both the real and the personal property in accordance with his rights and remedies in respect of the real property in which case the provisions of this part do not apply.
  (5) When a secured party has reduced his claim to judgment the lien of any levy which may be made upon his collateral by virtue of any execution based upon the judgment shall relate back to the date of the perfection of the security interest in the collateral. A judicial sale, pursuant to the execution, is a foreclosure of the security interest by judicial procedure within the meaning of this section, and the secured party may purchase at the sale and thereafter hold the collateral free of any other requirements of this chapter."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 6, Uniform Trust Receipts Act; Sections 16 through 26, Uniform Conditional Sales Act.
  Purposes. 1. The rights of the secured party in the collateral after the debtor's default are of the essence of a security transaction. These are the rights which distinguish the secured from the unsecured lender. This section and the following six sections state those rights as well as the limitations on their free exercise which legislative policy requires for the protection not only of the defaulting debtor but of other creditors. But subsections (1) and (2) make it clear that the statement of rights and remedies in this part does not exclude other remedies provided by agreement.
  2. Following default and the taking possession of the collateral by the secured party, there is no longer any distinction between the security interest which before default was nonpossessory and that which was possessory under a pledge. Therefore no general distinction is taken in this part between the rights of a nonpossessory secured party and those of a pledgee; the latter, being in possession of the collateral at default, will of
course not have to avail himself of the right to take possession under Section 9-503.
  3. Section 9-207 states rights, remedies, and duties with respect to collateral in the secured party's possession. That section applies not only to the situation where he is in possession before default, as a pledgee, but also, by subsections (1) and (2) of this section, to the secured party in possession after default. Nevertheless the relations of the parties have been changed by default, and Section 9-207 as it applies after default must be read together with this part. In particular, agreements permitted under Section 9-207 cannot waive or modify the rights of the debtor contrary to subsection (3) of this section.
  4. Section 1-102(3) states rules to determine which provisions of this act are mandatory and which may be varied by agreement. In general, provisions which relate to matters which come up between immediate parties may be varied by agreement. In the area of rights after default our legal system has traditionally looked with suspicion on agreements designed to cut down the debtor's rights and free the secured party of his duties; no mortgage clause has ever been allowed to clog the equity of redemption. The default situation offers great scope for overreaching; the suspicious attitude of the courts has been grounded in common sense.
  Subsection (3) of this section contains a codification of 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 not specified in subsection (3) are subject to the general rules stated in Section 1-102(3).
  5. The collateral for many corporate security issues consists of both real and personal property. In the interest of simplicity and speed subsection (4) permits, although it does
not require, the secured party to proceed as to both real and personal property in accordance with his rights and remedies in respect of the real property. Except for the permission so granted, this act leaves to other state law all questions of procedure with respect to real property. For example, this act does not determine whether the secured party can proceed against the real estate alone and later proceed in a separate action against the personal property in accordance with his rights and remedies against the real estate. By such separate actions the secured party "proceeds as to both", and this part does not apply in either action. But subsection (4) does give him an option to proceed under this part as to the personal property.
  6. Under subsection (1) a secured party is entitled to reduce his claim to judgment or to foreclose his interest by any available procedure, outside this article, which state law may provide. The first sentence of subsection (5) makes clear that any judgment lien which the secured party may acquire against the collateral is, so to say, a continuation of his original interest (if perfected) and not the acquisition of a new interest or a transfer of property to satisfy an antecedent debt. The judgment lien is therefore stated to relate back to the date of perfection of the security interest. The second sentence of the subsection makes clear that a judicial sale following judgment, execution, and levy is one of the methods of foreclosure contemplated by subsection (1); such a sale is governed by other law and not by this article and the restrictions which this article imposes on the right of a secured party to buy in the collateral at a sale under Section 9-504 do not apply.
  Cross references:
  Point 2: Section 9-503.
  Point 3: Section 9-207.
  Point 4: Section 1-102(3).
  Point 5: Sections 9-102(1) and 9-104(j).
  Point 6: Section 9-504.
  Definitional cross references:
  "Agreement": Section 1-201.
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Documents": Section 9-105.
  "Goods": Section 9-105.
  "Remedy": Section 1-201.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  The change is purely technical, to clear up an ambiguity as to whether a debtor could after default agree on the time within which a sale might be held or the time after which a secured party might keep the goods in lieu of a sale.
  "Section 36-9-502. Collection rights of secured party.
  (1) When so agreed and in any event on default the secured party is entitled to notify an account debtor or the obligor on an instrument to make payment to him whether or not the assignor was theretofore making collections on the collateral, and also to take control of any proceeds to which he is entitled under Section 36-9-306.
  (2) A secured party who by agreement is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor and who undertakes to collect from the account debtors or obligors must proceed in a commercially reasonable manner and may deduct his reasonable expenses of realization from the collections. If the security agreement secures an indebtedness, the secured party must account
to the debtor for any surplus, and unless otherwise agreed, the debtor is liable for any deficiency. But, if the underlying transaction was a sale of accounts or chattel paper, the debtor is entitled to any surplus or is liable for any deficiency only if the security agreement so provides."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. The assignee of accounts, chattel paper, or instruments holds as collateral property which is not only the most liquid asset of the debtor's business but also property which may be collected without any interruption of the business, assuming it to continue after default. The situation is far different from that where the collateral is inventory or equipment, whose removal may bring the business to a halt. Furthermore the problems of valuation and identification, present where the collateral is tangible chattels, do not arise so sharply on the assignment of intangibles. Considerations, similar although not identical, apply to assignments of general intangibles, which are also covered by the rule of the section. Consequently, this section recognizes the fact that financing by assignment of intangibles lacks many of the complexities which arise after default in other types of financing, and allows the assignee to liquidate in the regular course of business 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). By agreement, of course, the secured party may have the right to
give notice and to make collections before default.
  2. In one form of accounts receivable financing, which is found in the "factoring" arrangements which are common in the textile industry, the assignee assumes the credit risk - that is, he buys the account under an agreement which does not provide for recourse or charge-back against the assignor in the event the account proves uncollectible. Under such an arrangement, neither the debtor nor his creditors have any legitimate concern with the disposition which the assignee makes of the accounts. Under another form of accounts receivable financing, however, the assignee does not assume the credit risk and retains a right of full or limited recourse or charge-back for uncollectible accounts. In such a case both debtor and creditors have a right that the assignee not dump the accounts, if the result will be to increase a possible deficiency claim or to reduce a possible surplus.
  3. Where an assignee has a right of charge-back or a right of recourse, subsection (2) provides that liquidation must be made with due regard to the interest of the assignor and of his other creditor - "in a commercially reasonable manner" [compare Section 9-504 and see Section 9-507(2)] - and the proceeds allocated to the expenses of realization and to the indebtedness. If the "charge-back" provisions of the assignment arrangement provide only for "charge-back" of bad accounts against a reserve, the debtor's claim to surplus and his liability for a deficiency are limited to the amount of the reserve.
  4. Financing arrangements of the type dealt with by this section are between businessmen. The last sentence of subsection (2) therefore preserves freedom of contract, and the subsection recognizes that there may be a true sale of accounts or chattel paper although
recourse exists. The determination whether a particular assignment constitutes a sale or a transfer for security is left to the courts. Note that, under Section 9-102, this article applies both to sales and to security transfers of such intangibles.
  Cross references:
  Sections 9-205 and 9-306.
  Point 3: Sections 9-504 and 9-507(2).
  Point 4: Sections 9-102(1)(b) and 9-104(f).
  Definitional cross references:
  "Account": Section 9-106.
  "Account debtor": Section 9-105.
  "Agreement": Section 1-201.
  "Chattel paper": Section 9-105.
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Instrument": Section 9-105.
  "Notify": Section 1-201.
  "Proceeds": Section 9-306.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  The one change in this section is the deletion of the term "contract rights", which is eliminated as a separate form of collateral in the 1972 Text. See the Reporter's Notes to Section 9-106.
  "Section 36-9-503. Secured party's right to take possession after default.
  Unless otherwise agreed a secured party has on default the right to take possession of the collateral. In taking possession a secured party may proceed without judicial process if this can be done without breach of the peace or may proceed by action. If the security agreement so provides the secured party may require the debtor to assemble the collateral and make it available to the secured party at a
place to be designated by the secured party which is reasonably convenient to both parties. Without removal a secured party may render equipment unusable and may dispose of collateral on the debtor's premises under Section 36-9-504."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 6, Uniform Trust Receipts Act; Sections 16 and 17, Uniform Conditional Sales Act.
  Purposes. Under this article the secured party's right to possession of the collateral (if he is not already in possession as pledgee) accrues on default unless otherwise agreed in the security agreement. This article follows the provisions of the earlier uniform legislation in allowing the secured party in most cases to take possession without the issuance of judicial process. In the case of collateral such as heavy equipment, the physical removal from the debtor's plant and the storage of the equipment pending resale may be exceedingly expensive and in some cases impractical. The section therefore provides that in lieu of removal the lender may render equipment unusable or dispose of collateral on the debtor's premises. The authorization to render equipment unusable or to dispose of collateral without removal would not justify unreasonable action by the secured party, since, under Section 9-504(3), all his actions in connection with disposition must be taken in a "commercially reasonable manner".
  Cross reference:
  Section 9-504.
  Definitional cross references:
  "Action": Section 1-201.
  "Collateral": Section 9-105.
  "Debtor": Section 9-105.
  "Equipment": Section 9-109.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
SOUTH CAROLINA REPORTER'S NOTES
  There is no change from the 1962 Text, which was adopted by South Carolina in 1966. In this connection, the right of a secured party to use the self-help remedy without a prior judicial hearing was challenged on constitutional grounds in several courts in the early 1970's, but all the cases ultimately upheld the constitutionality of Section 9-503. See e.g., 31 Bus. Law. 893, 914-15 (1975).
  "Section 36-9-504. Secured party's right to dispose of collateral after default; effect of disposition.
  (1) A secured party after default may sell, lease, or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation or processing. Any sale of goods is subject to the Chapter on Sales (Chapter 2). The proceeds of disposition must be applied in the order following to:
    (a) the reasonable expenses of retaking, holding, preparing for sale or lease, selling, leasing, and the like and, to the extent provided for in the agreement and not prohibited by law, the reasonable attorney's fees and legal expenses incurred by the secured party;
    (b) the satisfaction of indebtedness secured by the security interest under which the disposition is made;
    (c) the satisfaction of indebtedness secured by any subordinate security interest in the collateral if written notification of demand therefor is received before distribution of the proceeds is completed. If requested by the secured party, the holder of a subordinate
security interest must seasonably furnish reasonable proof of his interest, and unless he does so, the secured party need not comply with his demand.
  (2) If the security interest secures an indebtedness, the secured party shall account to the debtor for any surplus, and, unless otherwise agreed, the debtor is liable for any deficiency. If the underlying transaction was a sale of accounts or chattel paper, the debtor is entitled to any surplus or is liable for any deficiency only if the security agreement so provides.
  (3) Disposition of the collateral may be by public or private proceedings and may be made by way of one or more contracts. Sale or other disposition may be as a unit or in parcels and at any time and place and on any terms but every aspect of the disposition including the method, manner, time, place, and terms must be commercially reasonable. Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made must be sent by the secured party to the debtor, if he has not signed after default a statement renouncing or modifying his right to notification of sale. In the case of consumer goods no other notification need be sent. In other cases notification must be sent to any other secured party from whom the secured party has received (before sending his notification to the debtor or before the debtor's renunciation of his rights) written notice of a claim of an interest in the collateral. The secured party may buy at any public sale, and if the collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely
distributed standard price quotations he may buy at private sale.
  (4) When collateral is disposed of by a secured party after default, the disposition transfers to a purchaser for value all of the debtor's rights in the collateral, discharges the security interest under which it is made and any security interest or lien subordinate thereto. The purchaser takes free of all of these rights and interests even though the secured party fails to comply with the requirements of this part or of any judicial proceedings:
    (a) in the case of a public sale, if the purchaser has no knowledge of any defects in the sale and if he does not buy in collusion with the secured party, other bidders, or the person conducting the sale; or
    (b) in any other case, if the purchaser acts in good faith.
  (5) A person who is liable to a secured party under a guaranty, indorsement, repurchase agreement, or the like and who receives a transfer of collateral from the secured party or is subrogated to his rights has thereafter the rights and duties of the secured party. This transfer of collateral is not a sale or disposition of the collateral under this chapter."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 6, Uniform Trust Receipts Act; Sections 19, 20, 21, and 22, Uniform Conditional Sales Act.
  Purposes. 1. The Uniform Trust Receipts Act provides that an entruster in possession after default holds the collateral with the rights and duties of a pledgee, and, in particular, that he may sell such collateral at public or private sale with a right to claim deficiency and a duty to account for any surplus. The Uniform
Conditional Sales Act insisted on a sale at public auction with elaborate provisions for the giving of notice of sale. This section follows the more liberal provisions of the Trust Receipts Act. Although public sale is recognized, it is hoped that private sale will be encouraged where, as is frequently the case, private sale through commercial channels will result in higher realization on collateral for the benefit of all parties. The only restriction placed on the secured party's method of disposition is that it must be commercially reasonable. In this respect this section follows the provisions of the section on resale by a seller following a buyer's rejection of goods (Section 2-706). Subsection (1) does not restrict disposition to sale; the collateral may be sold, leased, or otherwise disposed of - subject of course to the general requirement of subsection (2) that all aspects of the disposition be "commercially reasonable". Section 9-507(2) states some tests as to what is "commercially reasonable".
  2. Subsection (1) in general follows prior law in its provisions for the application of proceeds and for the debtor's right to surplus and liability for deficiency. Under paragraph (1)(c) the secured party, after paying expenses of retaking and disposition and his own debt, is required to pay over remaining proceeds to the extent necessary to satisfy the holder of any junior security interest in the same collateral if the holder of the junior interest has made a written demand and furnished on request reasonable proof of his interest; this provision is necessary in view of the fact that under subsection (4) the junior interest is discharged by the disposition. Since the requirement is conditioned on written demand, it should not result in undue burden on the secured party making the disposition. It should be noted also that under Section 9-112 where the secured party
knows that the collateral is owned by a person who is not the debtor, the owner of the collateral and not the debtor is entitled to any surplus.
  3. In any security transaction the debtor (or the owner of the collateral if other than the debtor: see Section 9-112) is entitled to any surplus which results from realization on the collateral; the debtor will also, unless otherwise agreed, be liable for any deficiency. Subsection (2) so provides. Since this article covers sales of certain intangibles as well as transfers for security, the subsection also provides that apart from agreement the right to surplus or liability for deficiency does not accrue where the transaction between debtor and secured party was a sale and not a security transaction.
  4. Subsection (4) provides that a purchaser for value from a secured party after default takes free of any rights of the debtor and of the holders of junior security interests and liens, even though the secured party has not complied with the requirements of this part or of any judicial proceedings. This subsection follows a similar provision in the Uniform Trust Receipts Act and in the section of this act on resale by a seller (Section 2-706). Where the purchaser for value has bought at a public sale he is protected under paragraph (a) if he has no knowledge of any defects in the sale and was not guilty of collusive practices. Where the purchaser for value has bought at a private sale he must, to receive the protection of paragraph (b), qualify in all respects as a purchaser in good faith. Thus while the purchaser at a private sale is required to proceed in the exercise of good faith, the purchaser at public sale is protected so long as he is not actively in bad faith, and is put under no duty to inquire into the circumstances of the sale.
  5. Both the Uniform Trust Receipts Act and the Uniform Conditional Sales Act required a waiting period after repossession and before sale (five days in the Trust Receipts Act, ten days in the Conditional Sales Act). Under subsection (3), the secured party in most cases is required to give reasonable notification of disposition to the creditor unless the debtor has after default signed a statement renouncing or modifying his right to notification of sale.
  The secured party must also (except for consumer goods) give notice to any other secured parties who have in writing given notice of a claim of an interest in the collateral. This latter notice must be given before the debtor renounces his rights or before the secured party gives his notification to the debtor. Compare Section 9-505(2). Except for the requirement of notification there is no statutory period during which the collateral must be held before disposition. "Reasonable notification" is not defined in this article; at a minimum it must be sent in such time that persons entitled to receive it will have sufficient time to take appropriate steps to protect their interests by taking part in the sale or other disposition if they so desire.
  6. Section 19 of the Uniform Conditional Sales Act required that sale be made not more than thirty days after possession taken by the conditional vendor. The Uniform Trust Receipts Act contained no comparable provision. Here again this article follows the Trust Receipts Act, and no period is set within which the disposition must be made, except in the case of consumer goods which under Section 9-505(1) must in certain instances be sold within ninety days after the secured party has taken possession. The failure to prescribe a statutory period during which disposition must be made is in line with the policy adopted in this article to encourage disposition by private sale through
regular commercial channels. It may, for example, be wise not to dispose of goods when the market has collapsed, or to sell a large inventory in parcels over a period of time instead of in bulk. Note, however, that under subsection (3) every aspect of the sale or other disposition of the collateral must be commercially reasonable; this specifically includes method, manner, time, place, and terms. See Section 9-507(2). Under that provision a secured party who without proceeding under Section 9-505(2) held collateral a long time without disposing of it, thus running up large storage charges against the debtor, where no reason existed for not making a prompt sale, might well be found not to have acted in a "commercially reasonable" manner. See also Section 1-203 on the general obligation of good faith.
  Cross references:
  Point 1: Sections 2-706 and 9-507(2).
  Point 2: Section 9-112.
  Point 3: Sections 9-102(1)(b) and 9-112.
  Point 4: Section 2-706.
  Point 6: Sections 9-505 and 9-507(2).
  Definitional cross references:
  "Account": Section 9-106.
  "Agreement": Section 1-201.
  "Chattel paper": Section 9-105.
  "Collateral": Section 9-105.
  "Consumer goods": Section 9-109.
  "Contract": Section 1-201.
  "Debtor": Section 9-105.
  "Financing statement": Section 9-402.
  "Gives notification": Section 1-201.
  "Good faith": Section 1-201.
  "Goods": Section 9-105.
  "Knowledge": Section 1-201.
  "Person": Section 1-201.
  "Proceeds": Section 9-306.
  "Purchaser": Section 1-201.
  "Receives notification": Section 1-201.
  "Rights": Section 1-201.
  "Sale": Sections 2-106 and 9-105.
  "Secured party": Section 9-105.
  "Security agreement": Section 9-105.
  "Security interest": Section 1-201.
  "Send": Section 1-201.
  "Term": Section 1-201.
  "Value": Section 1-201.
  "Written": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. Under the 1962 Text the secured party giving notice of sale had to notify (except in the case of consumer goods) not only every other person who had duly filed a financing statement indexed in the name of the debtor in the State and who still had a security interest in the collateral, but also any other person known by the secured party to have an interest in the collateral. This meant that the secured party had to search the records in every case where notice of sale to persons other than the debtor was required, to ascertain whether there were any other secured parties with financing statements that might be deemed to cover the collateral in question. Moreover, he ran the risk that some informal communication by letter, or even orally, might be deemed to have given him knowledge of the interest of that other party. These burdens of searching the record and of checking the security party's files were greater than the circumstances called for because as a practical matter there would seldom be a junior secured party who really had an interest needing protection in the case of a foreclosure sale. Therefore, a change is made requiring notice to persons other than the debtor in cases involving collateral other than consumer goods only if such persons had notified the secured party in writing of their claim of an interest in the collateral before he sent his
notification to the debtor or before the debtor's renunciation of his rights. As far as the holder or a junior security interest is concerned the best way to assure that the proper notice has been given to a senior secured party is to send the senior secured party a letter advising him of the additional security interest at the time the junior security interest is entered into.
  An additional change in the wording of subsection (3) makes it explicitly clear that the right of a debtor to renounce or modify his right to notice can only be made after, but not before, default. A corresponding change is made in Section 9-505.
  2. The new language dealing with leases in subsection (1) is merely a technical amendment.
  3. Note that this section, unlike Section 45-164 of the 1962 South Carolina Code dealing with chattel mortgages which has been repealed does not specify in detail the requirements for notice of a public sale. All that is required is that a "reasonable" notice be given. However, if a court later determines that the notice given by the secured party was unreasonable, then the secured party can be held liable for damages and penalties under Section 9-507(1). There is also a split in the decisions as to whether a failure to comply with the notice and other requirements of Part 5 results in preventing the secured party from recovering any deficiency from the debtor on the grounds that the sale was not commercially reasonable. See e.g., Clark Leasing Corp. v. White Sands Forest Products, Inc., 87 N.M. 451, 535 P. 2d 1077 (1975) for a good review of the three positions adopted by courts on this point.
  Part 6 to Article 9, added by this act specifies the content and other requirements of public sale notices and states that although the provisions of Part 6 are not mandatory, substantial compliance will "conclusively be
deemed to be commercially reasonable in all respects". This new Part 6 seems to have worked reasonably well in North Carolina which has a similar provision. At the very least, the procedures provide a "safe harbor" for secured parties conducting public sales.
  "Section 36-9-505. Compulsory disposition of collateral; acceptance of the collateral as discharge of obligation.
  (1) If the debtor has paid sixty percent of the cash price in the case of a purchase money security interest in consumer goods or sixty percent of the loan in the case of another security interest in consumer goods and has not signed after default a statement renouncing or modifying his rights under this part a secured party who has taken possession of collateral shall dispose of it under Section 36-9-504, and if he fails to do so within ninety days after he takes possession the debtor at his option may recover in conversion or under Section 36-9-507(1) on secured party's liability.
  (2) In any other case involving consumer goods or any other collateral a secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of this proposal must be sent to the debtor if he has not signed after default a statement renouncing or modifying his rights under this subsection. In the case of consumer goods no other notice need be given. In other cases notice must be sent to any other secured party from whom the secured party has received (before sending his notice to the debtor or before the debtor's renunciation of his rights) written notice of a claim of an interest in the collateral. If the secured party receives objection in writing from a person entitled to receive notification within twenty-one days after the notice was sent, the secured party shall dispose of the collateral
under Section 36-9-504. In the absence of a written objection the secured party may retain the collateral in satisfaction of the debtor's obligation."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 23, Uniform Conditional Sales Act.
  Purposes. 1. Experience has shown that the parties are frequently better off without a resale of the collateral; hence this section sanctions an alternative arrangement. In lieu of resale or other disposition, the secured party may propose under subsection (2) that he keep the collateral as his own, thus discharging the obligation and abandoning any claim for a deficiency. This right may not be exercised in the case of consumer goods where the debtor has paid sixty percent of the price of obligation and thus has a substantial equity, and may be exercised in other cases only on notification to the debtor, unless the debtor has signed after default a statement renouncing or modifying his rights under this section, and (except in the case of consumer goods) to any other secured party who has given written notice of a claim of an interest in the collateral. In the latter case, notice must be given before the secured party receives the debtor's renunciation or before he sends his notice to the debtor. The secured party may keep the goods in lieu of sale on failure of anyone receiving notification to object within twenty-one days.
  2. When an objection is received by the secured party he must then proceed to dispose of the collateral in accordance with Section 9-504, and on failure to do so would incur the liabilities set out in Section 9-507. In the case of consumer goods where sixty percent of the
price or obligation has been paid the disposition
must be made within ninety days after possession
taken. For failure to make the sale within the ninety-day period the secured party is liable in conversion or alternatively may incur the liabilities set out in Section 9-507.
  In the absence of objection the secured party is bound by his notice.
  3. After default (but not before) a consumer-debtor who has paid sixty percent of the cash price may sign a written renunciation of his rights to require resale of the collateral.
  Cross references:
  Sections 9-504 and 9-507(1).
  Definitional cross references:
  "Collateral": Section 9-105.
  "Consumer goods": Section 9-109.
  "Debtor": Section 9-105.
  "Knows": Section 1-201.
  "Notice": Section 1-201.
  "Person": Section 1-201.
  "Purchase money security interest":
Section 9-107.
  "Receives notification":
Section 1-201.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
  "Send": Section 1-201.
  "Signed": Section 1-201.
  "Written": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  1. Until the enactment of Act 413 of 1980, effective May 19, 1980, subsection (1) of this section required compulsory disposition of collateral to be completed within twenty-one days of repossession by the secured party rather than the ninety-day period specified in both the 1962 and 1972 UCC Texts. Act 413 of 1980 increased the maximum compulsory sales period from twenty-one to the ninety-day standard in the Official Texts. As a practical matter it is
extremely difficult to arrange for a sale of repossessed collateral in three weeks; and forcing a sale in such a short period undoubtedly worked to the debtor's disadvantage in that the secured party may well have been forced to take the first offer he got in order to comply with the now repealed twenty-one day requirement, thereby increasing the possibility of a deficiency due by the debtor or reducing the amount of any surplus due the debtor after satisfaction of the security interest.
  2. Under subsection (2) of this section the secured party may in lieu of sale give notice to the debtor and certain other persons that he proposes to retain the collateral in lieu of sale. Under the 1962 Text the other persons were the same as those who were entitled to notice of sale under Section 9-504(3), and such other persons are limited by the change in the same fashion as they were limited in Section 9-504(3) and for the same reasons. See the Reporter's Notes to Section 9-504.
"Section 36-9-506. Debtor's Right to Redeem Collateral.
  At any time before the secured party has disposed of collateral or entered into a contract for its disposition under Section 36-9-504 or before the obligation has been discharged under Section 36-9-505(2) the debtor or any other secured party may unless otherwise agreed in writing after default redeem the collateral by tendering fulfillment of all obligations secured by the collateral as well as the expenses reasonably incurred by the secured party in retaking, holding, and preparing the collateral for disposition, in arranging for the sale, and to the extent provided in the agreement and not prohibited by law, his reasonable attorneys' fees and legal expenses."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: Section 18, Uniform Conditional Sales Act.
  Purposes. Except in the case stated in Section 9-505(1) (consumer goods) the secured party is not required to dispose of collateral within any stated period of time. Under this section so long as the secured party has not disposed of collateral in his possession or contracted for its disposition, and so long as his right to retain it has not become fixed under Section 9-505(2), the debtor or another secured party may redeem. The debtor must tender fulfillment of all obligations secured, plus certain expenses; if the agreement contains a clause accelerating the entire balance due on default in one installment, the entire balance would have to be tendered. "Tendering fulfillment" obviously means more than a new promise to perform the 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 obligations remain, the security interest continues to secure them as if there had been no default.
  Under Section 9-504 the secured party may make successive sales of parts of the collateral in his possession. The fact that he may have sold or contracted to sell part of the collateral would not affect the debtor's right under this section to redeem what was left. In such a case, of course, in calculating the amount required to be tendered the debtor would receive credit for net proceeds of the collateral sold.
  Cross references:
  Sections 9-504 and 9-505.
  Definitional cross references:
  "Agreement": Section 1-201.
  "Collateral": Section 9-105.
  "Contract": Section 1-201.
  "Debtor": Section 9-105.
  "Secured party": Section 9-105.
  "Writing": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  No change in the text of this section has been made in the 1972 Text.
  "Section 36-9-507. Secured party's liability for failure to comply with this part.
  (1) If it is established that the secured party is not proceeding in accordance with the provisions of this part disposition may be ordered or restrained on appropriate terms and conditions. If the disposition has occurred the debtor or any person entitled to notification or whose security interest has been made known to the secured party prior to the disposition has a right to recover from the secured party any loss caused by a failure to comply with the provisions of this part. If the collateral is consumer goods, the debtor has a right to recover in any event an amount not less than the credit service charge plus ten percent of the principal amount of the debt or the time price differential plus ten percent of the cash price.
  (2) The fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the secured party is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner. If the secured party either sells the collateral in the usual manner in any recognized market for the collateral or if he sells at the price current in the market at the time of his sale or if he has otherwise sold in conformity with reasonable commercial practices among dealers in the type of property sold he has sold in a commercially reasonable manner. The principles stated in the two preceding sentences with respect to sales
also apply as may be appropriate to other types of disposition. A disposition which has been approved in any judicial proceeding or by any bona fide creditors' committee or representative of creditors is conclusively considered to be commercially reasonable, but this sentence does not indicate that approval must be obtained in any case nor does it indicate that any disposition not so approved is not commercially reasonable."
OFFICIAL COMMENT
  Prior Uniform Statutory Provision: None.
  Purposes. 1. The principal limitation on the secured party's right to dispose of collateral is the requirement that he proceed in good faith (Section 1-203) and in a commercially reasonable manner. See Section 9-504. In the case where he proceeds, or is about to proceed, in a contrary manner, it is vital both to the debtor and other creditors to provide a remedy for the failure to comply with the statutory duty. This remedy will be of particular importance when it is applied prospectively before the unreasonable disposition has been concluded. This section therefore provides that a secured party proposing to dispose of collateral in an unreasonable manner, may, by court order, be restrained from doing so, and such an order might appropriately provide either that he proceed with the sale or other disposition under specified terms and conditions, or that the sale be made by a representative of creditors where insolvency proceedings have been instituted. The section further provides for damages where the unreasonable disposition has been concluded, and, in the case of consumer goods, states a minimum recovery.
  A case may be put in which the liquidation value of an insolvent estate would be enhanced by disposing of all the debtor's property
(including that subject to a security interest) in the liquidation proceeding and in which, if a secured party repossesses and sells that part of the property which he holds as collateral, the remainder will have little or no resale value. In such a case the question may arise whether a particular court has the power to control the manner of disposition, although reasonable in other respects, in order to preserve the estate for the benefit of creditors. Such a power is no doubt inherent in a federal bankruptcy court, and perhaps also in other courts of equity administering insolvent estates. Traditionally it was not exercised where the secured party claimed under a title retention device, such as conditional sale or trust receipt. See In re Lake's Laundry, Inc., 79 F.2d 326 (2d Cir. 1935) and the remarks of Clark, J., concurring, in In re White Plains Ice Service, Inc., 109 F.2d 913 (2d Cir. 1940). It has been held that distinctions in results based on these distinctions in form have been made obsolete by this article. In re Yale Express System, Inc., 370 F.2d 433 (2d Cir., 1966), 384 F.2d 990 (2d Cir. 1967).
  2. In view of the remedies provided the debtor and other creditors in subsection (1) when a secured party does not dispose of collateral in a commercially reasonable manner, it is of great importance to make clear what types of disposition are to be considered commercially reasonable, and in an appropriate case to give the secured party means of getting, by court order or negotiation with a creditor's committee or a representative of creditors, approval of a proposed method of disposition as a commercially reasonable one. Subsection (2) states rules to assist in the determination, and provides for such advance approval in appropriate situations. One recognized method of disposing of repossessed collateral is for the secured party to sell the collateral to or
through a dealer - a method which in the long run may realize better average returns since the secured party does not usually maintain his own facilities for making such sales. Such a method of sale, fairly conducted, is recognized as commercially reasonable under the second sentence of subsection (2). However, none of the specific methods of disposition set forth in subsection (2) is to be regarded as either required or exclusive, provided only that the disposition made or about to be made by the secured party is commercially reasonable.
  Cross references:
  Point 1: Sections 1-203, 9-202, and 9-504.
  Definitional cross references:
  "Collateral": Section 9-105.
  "Consumer goods": Section 9-109.
  "Creditor": Section 1-201.
  "Debtor": Section 9-105.
  "Knows": Section 1-201.
  "Notification": Section 1-201.
  "Person": Section 1-201.
  "Representative": Section 1-201.
  "Rights": Section 1-201.
  "Secured party": Section 9-105.
  "Security interest": Section 1-201.
SOUTH CAROLINA REPORTER'S NOTES
  No change in the text of this section has been made in the 1972 Text.
Disposition of collateral by public sale
"Part 6
Public Sale of Procedures
  Section 36-9-601. Disposition of collateral by public sale.
  Disposition of collateral by public proceedings as permitted by Section 36-9-504 may
be made in accordance with the provisions of this part. The provisions of this part are not mandatory for disposition by public proceedings, but any disposition of the collateral by public sale wherein the secured party has substantially complied with the procedures provided in this part is conclusively considered to be commercially reasonable in all aspects."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  1. Part 6 is not part of the UCC Official Text. It is derived from similar provisions in the North Carolina UCC, North Carolina general statute, Sections 25-9-601 through 25-9-607. As is pointed out in Reporter's Note 3 to Section 36-9-505, it is designed to provide a "safe harbor" for public sales of repossessed collateral. This is accomplished by the last part of Section 39-9-601, which states that a public sale that substantially complies "with the procedures provided in this Part shall conclusively be deemed to be commercially reasonable in all respects". At the present time the only other similar "safe harbor" is a judicially approved public sale, a more cumbersome and expensive procedure.
  2. The North Carolina Supreme Court has held its similar provisions to be constitutional. See North Carolina National Bank v. Burnette, 297 N.C. 524, 256 S.E. 2d 388 (1979); Wachovia Bank and Trust Co. v. Murphy, 36 N.C. App. 760, 245 S.E. 2d 101, appeal dismissed, 295 N.C. 557, 248 S.E. 2d 734 (1978).
  3. A public sale not made in conformity to this Part and all private sales would continue to be subject to the commercial reasonableness test in Part 5. Section 36-9-507 specifies the
remedies for a sale that is determined not to be commercially reasonable.
  "Section 36-9-602. Contents of notice of sale.
  The notice of sale shall substantially:
  (a) Refer to the security agreement pursuant to which the sale is held;
  (b) Designate the date, hour, and place of sale consistent with the provisions of the security agreement and the provisions found in this part;
  (c) Describe personal property to be sold substantially as it is described in the security agreement pursuant to which the power of sale is being exercised and may add a further description as will acquaint bidders with the nature of the property;
  (d) State the terms of the sale provided by the security agreement pursuant to which the sale is held, including the amount of the cash deposit, if any, to be made by the highest bidder at the sale;
  (e) Include any other provisions required by the security agreement to be included therein;
  (f) State that the property will be sold subject to taxes and special assessments if it is to be so sold."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section sets out the information that must be included in the notice of a public sale conducted pursuant to this part.
  "Section 36-9-603. Posting and Mailing Notice of Sale.
  (1) In each public sale conducted, the notice of sale must be posted on a bulletin board provided for the posting of legal notices, in
the courthouse, in the county in which the sale is to be held, for at least five days immediately preceding the sale.
  (2) In addition to the posting of notice required by subsection (1), the secured party or other party holding a public sale shall, at least five days before the date of sale, mail by registered or certified mail a copy of the notice of sale to each debtor obligated under the security agreement:
    (a) At the actual address of the debtors, if known to the secured party, or
    (b) At the address, if any, furnished the secured party, in writing, by the debtors, or otherwise at the last known address.
  (3) In the case of consumer goods, no other notification need be sent. In other cases, in addition to mailing a copy of the notice of sale to each debtor, the secured party shall also mail a copy of such notice by registered or certified mail to any other secured party from whom the secured party has received (before sending the notice of sale to the debtor) written notice of a claim of an interest in the collateral.
  (4) The time for the posting of the notice of sale and the mailing of the notice required by this section shall be computed so as to exclude the first day of posting and mailing and to include the day on which the sale is to occur."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  1. The section sets out the places where the notice of the sale must be posted and mailed. It is somewhat similar to Section 45-164 of the 1962 South Carolina Code of Laws, which has been repealed. Section 45-164, however, required
posting in three public places at least fifty days prior to the sale or publication in a newspaper at least two weeks prior to the sale, and it did not require that any notice be given to the debtor or other persons claiming a security interest in the property being sold. The implied repeal of Section 45-164 of the 1962 Code created uncertainty concerning the notice requirements of a public sale. A secured party clearly had to send the notices to debtors and other secured parties required by Section 36-9-504(3); but it is unclear whether any public posting or publication is also required. This section resolves this issue.
  2. Except for the public posting of the notice of sale the notice requirements in this section are the same as those established in revised Section 36-9-504(3) for sales of collateral.
  "Section 36-9-604. Exception as to perishable property.
  If, in the opinion of a secured party about to conduct a public sale of personal property, the property is perishable because subject to rapid deterioration or threatens to decline speedily in value, he may report this fact, together with a description of the property to the clerk of court of the county in which the property is to be sold, and apply for authority to sell the property at an earlier date than is provided in this chapter. Upon the clerk's determination that the property is perishable or speedily depreciating property, he shall order a sale of the property to be held at a time and place and upon notice, if any, as he considers advisable."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section provides for a different procedure where perishable property is involved. The clerk of court must determine the time and place and the notice requirements. It provides for more certainty than the more general language in Section 36-9-504(3).
  "Section 36-9-605. Postponement of public sale.
  (1) Any person exercising a power of sale or conducting a public sale may postpone the sale to a day certain not later than six days, exclusive of Sunday, after the original date for the sale:
    (a) When there are no bidders; or
    (b) When, in his judgment, the number of prospective bidders at the sale is substantially decreased by inclement weather or by any casualty; or
    (c) When there are so many other sales advertised to be held at the same time and place as to make it inexpedient and impracticable in his judgment to hold the sale on that day; or
    (d) When he is unable to hold the sale because of illness or for other good reason; or
    (e) When other good cause exists.
  (2) Upon postponement of a public sale, the person exercising the power of sale shall personally, or through his agent or attorney:
    (a) At the time and place advertised for the sale, publicly announce the postponement of the sale;
    (b) On the same day, attach to or enter on the original notice of sale or a copy of the original notice of sale, posted on the bulletin board provided for this purpose, as provided by Section 36-9-603, a notice of the postponement.
  (3) The posted notice of postponement shall:
    (a) State that the public sale is postponed;
    (b) State the hour and date to which the public sale is postponed;
    (c) Substantially state the reason for the postponement;
    (d) Be signed by the person authorized to hold the public sale, or by his agent or attorney.
  (4) If a public sale is not held at the time fixed for the public sale and is not postponed as provided by this section, or if a postponed sale is not held at the time fixed for the postponed sale, the person authorized to hold the public sale may readvertise the property in the same manner as he was required to advertise the sale which was not held and may hold a public sale at a later date as is fixed in the new notice of sale."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section sets out procedures for postponed sales. No additional notices to the debtor or secured parties are required unless the rescheduled date is more than six days from the original date or the second sale is not held as scheduled.
  "Section 36-9-606. Procedure upon Dissolution of Order Restraining or Enjoining Sale.
  (1) When, before the date fixed for a sale, a judge of competent jurisdiction dissolves an order restraining or enjoining the sale, he may, if the required notice of sale has been given, as provided in Section 36-9-603, provide by order that the public sale must be held without additional notice at the time and place originally fixed for the public sale; or he may, in his discretion, make an order with respect to the public sale as provided in subsection (2).
  (2) When, after the date fixed for a public sale, a judge of competent jurisdiction dissolves an order restraining or enjoining the sale, he shall, by order, fix the time and place for the sale to be held upon notice to be given and in a manner and for a length of time as he considers advisable."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  The debtor or another secured party might seek to enjoin a proposed public sale brought under this part (see Section 36-9-103 and the comments to that section). If the selling party is successful in getting an injunction dissolved, the judge who issued the injunction must decide when and where the sale will be held and who shall be required to receive notice of the sale.
  "Section 36-9-607. Disposition of proceeds of sale.
  The proceeds of any sale or other disposition of the collateral must be applied by the person making the sale in the manner prescribed by Section 36-9-504 and by other applicable provisions of law."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section provides that the proceeds of any public sale conducted under this Part will be applied in the same manner as any other sale of collateral covered by an Article 9 security interest. See Section 39-9-504.
Effective date of Uniform Commercial Code
SECTION 6. Chapter 10 of Title 36 of the 1976 Code is amended to read:
"CHAPTER 10
Commercial Code-Effective Date and Repealer
Section
36-10-101 Effective Date.
36-10-102 Transactions Entered into
  Before Effective Date of
  Commercial Code.
36-10-103 General Repealer.
  Section 36-10-101. Effective date. Except as otherwise provided in Chapter 11 of this title, this title becomes effective at 12:01 a.m., January 1, 1968. It applies to transactions entered into and events occurring after that date."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section establishes the effective date for the entire Uniform Commercial Code as enacted in South Carolina. See Chapter 11 for the effective date of the 1972 Text amendments which are referred to in Chapter 11 as "the 1988 UCC Amendments". The language utilized in this section is the same as that used in the UCC as enacted in 1966 by the South Carolina General Assembly with the exception of the introductory phrase concerning Chapter 11.
  "Section 36-10-102. Transactions entered into before effective date of commercial code.
  Transactions validly entered into before the effective date specified in Section 36-10-101 and the rights, duties, and interest flowing from them remain valid thereafter and may be terminated, completed, consummated, or enforced as required or permitted by any statute or other law amended or repealed by this title as though the repeal or amendment had not occurred. Except as otherwise provided in Section 36-11-106 the filing of a properly executed financing statement pursuant to Section 36-9-402 or a properly executed continuation statement pursuant to Section 36-9-403(3) in the appropriate place or places specified in Section 36-9-401 is sufficient to satisfy the requirements of this section as to proper filing in the case of a transaction entered into prior to the effective date specified in Section 36-10-101. This section is considered to have been effective as of January 1, 1968."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  With the exception of the provisos which are new, the language in this section is the same as Section 10-102(2) of the 1962 Text. It was not adopted when the UCC was originally enacted in South Carolina in 1966, but was added in 1968. Essentially this section provides that any valid transaction entered into before January 1, 1968, the effective date of the UCC in South Carolina, will continue to be valid after the effective date of the UCC on the same basis as if the UCC had never been enacted.
  This means that as far as chattel mortgages that were effective on January 1, 1968, are
concerned, it would be permissible to renew the chattel mortgage in accordance with the provisions of Section 60-306 of the 1962 South Carolina Code even though Section 60-306 was impliedly repealed when the UCC was enacted. See the Reporter's Notes to Section 9(a)(7) and 9(b)(35) of this act. See also 1967-68 Op. Att. Gen. 2450 at pg. 110. However, this procedure presents two major practical problems: (1) is the refiling in the chattel mortgage books under Section 60-306 of the 1962 South Carolina Code the exclusive method of renewing such transactions, or is it also permissible to file a financing statement, which must be signed by both the secured party and the debtor, or merely a continuation statement, which need only be signed by the secured party; and (2) what type of filing must be made in situations where additional sums may have been advanced under a future advance clause in a chattel mortgage security agreement signed before January 1, 1968, or where additional collateral is added after the effective date of the UCC to a pre-January 1, 1968, chattel mortgage under an after-acquired property clause. The provisos at the end of this section, which are made retroactive to January 1, 1968, are designed to answer these questions by making it clear that the proper filing of either a financing statement or a continuation statement would be sufficient in the circumstances mentioned. The net result is that as far as pre-January 1, 1968, perfected chattel mortgages are concerned filing under Section 60-306 of the 1962 South Carolina Code or Sections 36-9-401 et seq. of the 1976 South Carolina Code will be sufficient to continue perfection of a pre-code secured transaction without any gap or rights accruing to any intervening creditor (including a trustee in bankruptcy). In addition, the enforcement of such pre-code transactions will be governed by their pre-code chattel mortgage statutes or Part
5 of Article 9 of the UCC at the option of the secured party mortgagee.
  Note that this section does not, except as explained below, eliminate the need to check the chattel mortgage records to determine if a pre-code secured transaction is still effective; however, sufficient time has passed since the effective date of the UCC in South Carolina that with the exception of some large industrial plant mortgages and indentures, most of the pre-code transactions have now either been terminated or satisfied or have been refinanced in a transaction fully covered by the UCC so the number of cases when an actual check of the chattel mortgage records will be necessary or desirable will not be burdensome. It is also important to note that after January 1, 1987, the effective date of the 1972 Text in South Carolina, an additional renewal of these pre-code transactions must be made in accordance with the provisions of Section 36-11-106(4), which requires the filing of a special type of financing statement in such circumstances. See Section 36-11-106(3). At the end of three years from the date specified in Section 36-11-101, it will therefore no longer be possible to continue perfection of these pre-code transactions by filing a renewal filing under Section 60-306, which authorizes a renewal for a maximum three-year period, and after that time there will be no further need to check the chattel mortgage books for any pre-code security interests.
  "Section 36-10-103. General repealer.
  All acts or parts of acts inconsistent with this act are repealed."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  See Sections 8 and 9 of this act for a list of the statutes that are either modified or repealed by the 1966 UCC and the 1988 UCC Amendments. The Reporter's Notes to these sections contain a detailed explanation of each affected code section.
Transition provisions
SECTION 7. Title 36 of the 1976 Code is amended by adding:
"CHAPTER 11
Effective Date and Transition Provisions for
the 1981 Uniform Commercial Code Amendments
Section
36-11-101 Effective Date of 1986
  Amendments.
36-11-102 Preservation of Old Transition
  Provisions.
36-11-103 Transition to 1988 UCC
  Amendments General Rule.
36-11-104 Transition Provisions on
  Change of Requirement of
  Filing.
36-11-105 Transition Provisions on
  Change of place of Filing.
36-11-106 Required Refilings.
36-11-107 Transition Provisions as to
  Priorities.
36-11-108 Presumption that Rule of Law
  Continues Unchanged.
  Section 36-11-101. Effective date of the 1988 amendments.
  The amendments to Title 36 contained in this Chapter become effective at 12:01 a.m. on January 1, 1989. The amendments to Title 36 contained in this chapter are officially designated as the 1988 UCC amendments; and the provisions of Act 1065 of 1966 are officially designated as the 1966 UCC."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  1. This chapter was prepared by the reporters of the UCC Permanent Editorial Board that drafted the 1972 Text but was not passed upon by the Article 9 Review Committee, the UCC Permanent Editorial Board, the American Law Institute, the National Conference of Commissioners on Uniform State Laws or the American Bar Association, all of which approved and recommended the other provisions of the 1972 Official Text. The rules in this chapter clarify many troublesome issues that would exist if it were not adopted. In this connection the vast majority of the states that have enacted the 1972 Text, including North Carolina, Virginia, and West Virginia, have enacted this chapter.
  2. This section establishes the effective date of the Official 1972 Revisions to Article 9 and related amendments (collectively referred to as the 1988 UCC amendments) and provides rules for determining whether the 1966 UCC (based on the 1962 official Text of the UCC) or the 1988 UCC amendments (based on the official 1972 Text) applies to the transaction in question as well as rules specifying what further action, if any, a secured party needs to take to maintain
perfection and priority of a security interest which has attached before the effective date specified in this section. It should be read in conjunction with Chapter 10, which provides transition rules for pre-code transactions. The effective date of the 1988 UCC amendments is a substantial time after enactment in order to allow ample time to inform persons affected by the UCC of these changes and to make any necessary refilings.
  "Section 36-11-102. Preservation of old transition procedures. Except as otherwise provided in Section 36-11-106(4), the provisions of Section 36-10-102 shall continue to apply to the 1988 UCC Amendments, and for this purpose the 1966 UCC and the 1988 UCC Amendments must be considered one continuous statute."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section preserves the principle of Section 36-10-102 of the 1966 UCC that pre-code transactions continue to be governed by pre-code law. A different principle is set forth in this Chapter 11 for transition problems between the 1966 UCC and the 1988 UCC Amendments because the changes are not nearly as great. That principle, with minor exceptions, is that the 1988 UCC amendments govern. See Section 36-11-103 et seq.
  Note that with respect to pre-code transactions, a financing statement meeting the requirements of Section 36-11-106(4) will have to be filed within six months before the perfection of the pre-code security interest would otherwise lapse under Section 36-10-102.
  "Section 36-11-103. Transition to 1988 UCC Amendments-general rule.
  Transactions validly entered into after the date specified in Section 36-10-101 and before the date specified in Section 36-11-101 and which were subject to the provisions of the 1966 UCC and which would be subject to the 1988 UCC Amendments if they had been entered into after the effective date of the 1988 UCC Amendments, and the rights, duties, and interests flowing from the transactions remain valid after the date specified in Section 36-11-101, and may be terminated, completed, consummated, or enforced as required or permitted by the 1988 UCC Amendments. Security interests arising out of the transactions which are perfected when the 1988 UCC Amendments become effective shall remain perfected until they lapse as provided in the 1988 UCC Amendments and may be continued as permitted by the 1988 UCC Amendments, except as stated in Section 36-11-105."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section makes the 1988 UCC Amendments applicable to existing security interests, e.g., the revised notice provisions of Part 5 will apply to existing security interests in the event of the debtor's default. At first glance this conclusion appears to be a contradiction of the specific language of Section 36-11-103 which provides that preamendment security interests which would be subject to amended Article 9 if they came into being after the effective date of the 1988 UCC Amendments "may be terminated, completed, consummated, or enforced as required or permitted by the 1988 UCC Amendments". While the quoted provision speaks of "may", it is
clear from the other provisions of Chapter 11 of the Official Reporter's discussion of this section that the "may" only relates to whether the particular party desires to assert his rights. That is, "may" refers to whether he chooses to enforce his rights or to not enforce them. He may do either if he so chooses. Once, however, he acts to enforce his rights he must act in accordance with the 1988 UCC Amendments and does not have a choice of proceeding under the preamendment law. To illustrate, if the creditor so desires, he "may" expose the collateral to sale after default, but if he does so, he must comply with the 1988 UCC Amendments in Part 5 of Chapter 9 as to notice and sale.
  The "except" clause at the end is necessary because of the possibility that new financing statements might have to be filed in different offices because of modifications made by the 1972 Text.
  "Section 36-11-104. Transition provisions on change of requirement of filing.
  A security interest for the perfection of which filing or the taking of possession was required under the 1966 UCC and which attached prior to the effective date of the 1988 UCC Amendments but was not perfected is considered perfected on the effective date set forth in Section 36-11-101 of the 1988 UCC Amendments permit perfection without filing or authorize filing in the office or offices where a prior ineffective filing was made."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This section is a further refinement on the basic transition rule set forth in Section 36-11-103. The 1988 UCC Amendments recognize that there are situations in which the amendments confer perfection on a security interest when the 1966 UCC refused perfection under the same circumstances. Section 36-11-104 cures the prior lapse of perfection by declaring as perfected any security interest which though unperfected by the 1966 UCC would be perfected if the facts had occurred after the effective date of the 1988 UCC Amendments. One case it covers is the situation where readily removable factory or office machinery or replacement domestic appliances are held to be fixtures but no proper fixture filing has been made. Under the 1966 UCC if the secured party had not filed a financing statement covering such collateral in the real estate mortgage records, the secured party's security interest would be subordinate to many real estate interests. However, under revised Section 36-9-313(4)(d), this same secured party will take priority over all owners or encumbrancers of the real estate in question even though no fixture filing has been made so long as the security interest has been perfected in some authorized manner. In the case of readily removable factory equipment held to be a fixture, if a financing statement had been filed in the Secretary of State's office before the effective date of the 1988 UCC Amendments, this filing would automatically result in the security interest having the priority granted by Section 9-313(4)(d) of the 1972 Text without any further action by the secured party. If a secured party had a purchase money security interest in replacement domestic appliances before the effective date of the 1988 UCC Amendments, the same result would occur under Section 9-313(4)(d) of the 1972 Text even though
no filing of any kind had been made. See also revised Section 36-9-302(1)(d), paragraph 2(c) of the Reporter's Notes to revised Section 36-9-313, and subsection (4) of new Section 36-11-105 below.
  The same rule is applied where the filing which was made was in an improper office when made but the office would be a proper office under the 1988 UCC Amendments. In such a case, the filing in what was originally a wrong office is transformed into a proper filing by the fact of the 1988 UCC Amendments becoming effective.
  In cases where the effectiveness of the 1988 UCC Amendments is relied on to cure the lack of perfection under the 1966 UCC, no action by the creditor is required. Thus there is no requirement that the creditor make any election or file any paper declaring that the security interest is now subject to or brought under the 1988 UCC Amendments.
  "Section 36-11-105. Transition provision on change of place of filing.
  (1) A financing statement or continuation statement filed prior to the date specified in Section 36-11-101 which has not lapsed prior to that date remains effective for the period provided in the 1966 UCC but not less than five years after the filing.
  (2) With respect to any collateral acquired by the debtor subsequent to the effective date of the 1988 UCC Amendments, any effective financing statement or continuation statement described in this section applies only if the filing or filings are in the office or offices that would be appropriate to perfect the security interest in the new collateral under the 1988 UCC Amendments.
  (3) The effectiveness of any financing statement or continuation statement filed prior to the date specified in Section 36-11-101 may be continued by a continuation statement as
permitted by the 1988 UCC Amendments, except that if the 1988 UCC Amendments require a filing in the office where there was no previous financing statement, a new financing statement conforming to Section 36-11-106 must be filed in that office.
  (4) If the record of a mortgage of real estate would have been effective as a fixture filing of goods described in the mortgage if the 1988 UCC Amendments had been in effect on the date of recording the mortgage, the mortgage is considered effective as a fixture filing as to the goods under subsection (6) of Section 36-9-402 of the 1988 UCC Amendments on the effective date of the 1988 UCC Amendments as specified in Section 36-11-101."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  Under subsection (1) all existing financing statements with a duration of less than five years are automatically extended to the full five years (and longer in cases involving security interests in fixtures of transmitting utilities and recorded mortgages serving as fixture filings) as in the case for all financing statements filed under the 1988 UCC Amendments. See Section 9-403(2), (3), and (6) of the 1972 Text. Like Section 9-403, however, this provision only affects the effectiveness of the financing statement for notice purposes; whether or not the secured party has an enforceable security interest that has priority over conflicting claims of the debtor's other creditors will depend on the validity and enforceability of the security agreement between the secured party and the debtor.
  Subsection (2) makes clear that all existing financing statements and continuations on the effective date of the 1988 UCC Amendments remain valid for the remainder of the five years as to existing collateral, even though the appropriate place for filing may have changed under the new rules for accounts, general intangibles, etc. The existing filings also apply to new collateral acquired after such effective date, unless the appropriate filing place is different under the new rules. In that case there will have to be a new filing on such effective date to cover the new collateral. Compare, for example, the proper filing place for accounts receivable of a debtor with offices in more than one state under Section 9-103 of the 1962 Text (Section 36-9-103 of the 1976 South Carolina Code of Laws), currently effective in South Carolina, and Section 9-103 of the 1972 Text (Section 36-9-103 in Section 5 of this act).
  Pursuant to subsection (3), a continuation statement may be filed after the effective date of the 1988 UCC Amendments, but if the appropriate places under the new rules are different, the filing should be a UCC-1 financing statement rather than a continuation statement.
  Subsection (4) retroactively validates a recorded real estate mortgage as a fixture filing. As is pointed out in the Reporter's Notes to Section 9-313 of the 1972 Text in Section 5 of this act a real estate mortgage would not ordinarily qualify as a financing statement under the 1966 UCC because of the absence of the mortgagee's signature. There was confusion on this point, however, and some mortgagees have been under the impression that a recorded real estate mortgage gave them a perfected security interest in the mortgagor's fixtures. Under the 1972 Text the secured party's signature is not required on a financing statement and a real estate mortgage can
therefore serve as a fixture filing. See also Section 36-9-402(1), (2), and (6) and the Reporter's Notes to Section 36-9-402.
  "Section 36-11-106. Required refilings.
  (1) If a security interest is perfected or has priority when the 1988 UCC Amendments take effect as to all persons or as to certain persons without any filing or recording, and if the filing of a financing statement would be required for the perfection or priority of the security interest against those persons under the 1988 UCC Amendments, the perfection and priority rights of the security interest continue until three years after the effective date of the 1988 UCC Amendments. The perfection will then lapse unless a financing statement is filed as provided in subsection (4) or unless the security interest is perfected otherwise than by filing.
  (2) If a security interest is perfected when the 1988 UCC Amendments take effect under a law other than the Uniform Commercial Code as enacted in South Carolina which requires no further filing, refiling, or recording to continue its perfection, perfection continues until and will lapse three years after the 1988 UCC Amendments take effect, unless a financing statement is filed as provided in subsection (4), or unless the security interest is perfected otherwise than by filing, or unless under subsection (3) of Section 36-9-302 the other law continues to govern filing.
  (3) If a security interest is perfected by a filing, refiling, or recording under a law repealed or modified by this Title 36 as amended by the 1988 UCC Amendments which required further filing, refiling, or recording to continue its perfection, perfection continues and will lapse on the date provided by the law so repealed or modified for further filing, refiling, or recording unless a financing
statement is filed as provided in subsection (4) or unless the security interest is perfected otherwise than by filing.
  (4) A financing statement may be filed within six months before the perfection of a security interest would otherwise lapse. The financing statement may be signed by either the debtor or the secured party. It must identify the security agreement, statement, or notice (however denominated in any statute or other law repealed or modified by this Title 36 as amended by the 1988 UCC Amendments), state the office where and the date when the last filing, refiling, or recording, if any, was made with respect thereto, and the filing number, if any, or book and page, if any, of recording and further state that the security agreement, statement, or notice, however denominated, in another filing office under the 1966 UCC or under any statute or other law repealed or modified by this Title 36 as amended by the 1988 UCC Amendments is still effective. Sections 36-9-401 and 36-9-103 determine the proper place to file the financing statement. Except as specified in this subsection, the provisions of Section 36-9-403(3) for continuation statements apply to the financing statement."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  Subsection (1) covers a purchase money security interest in farm equipment costing less than twenty-five hundred dollars which under the 1966 UCC is automatically perfected upon attachment without any filing. However, under the 1972 Text, a financing statement must be filed in order to have a perfected security interest in any farm equipment irrespective of
the cost. See the Reporter's Notes to Section 36-9-302 in Section 5 of this act. Under this section, a nonfiled purchased money security interest in farm equipment costing less than twenty-five hundred dollars would continue to be perfected without any filing for three years from the effective date of the 1988 UCC Amendments. Most of the purchases in question should be paid in full by the end of this three-year period. If not, then a financing statement meeting the requirements of subsection (4) must be timely filed. The subsection also applies to railway equipment trusts which under the 1972 Text are not excluded from Article 9 as is the case under the 1966 UCC (see existing Section 36-9-104(e) of the 1976 South Carolina Code), and would appear to allow three years for filing. Generally filing under Article 9 for equipment trusts covering railroad rolling stock is excluded by Section 9-302(3) of the 1972 Text, and the old preamendment filing under the Interstate Commerce Act will continue to serve the purpose. See the further discussion of security interests against other property owned by railroads in the next paragraph.
  Subsection (2) makes it clear that perfection of a security interest in automobiles and boats by means of notation on the certificate of title pursuant to the South Carolina Certificate of Title laws (see Section 9-302(3) of the 1972 Text), and perfection of security interests under statutes requiring national registration, such as copyrights (17 USC Sections 28 and 30) and aircraft (47 USC Section 523) will automatically continue to be effective under the 1988 UCC Amendments. This subsection and subsection (3) also cover security interests against transmitting utilities which under the laws of some states were dealt with in statutes other than the UCC and provided for indefinite filing duration. Two situations would be covered by these provisions: (1) existing
Section 36-9-403(4) of the 1976 South Carolina Code which provides for indefinite filing of security interests against rural electric cooperatives and public utilities subject to the jurisdiction of the South Carolina Public Service Commission; and (2) existing Section 36-9-302(3)(b) of the 1976 South Carolina Code which authorizes special filings for security interests against railroads that are valid for the life of the underlying real estate mortgage, pursuant to Section 30-11-20 of the 1976 South Carolina Code. These two South Carolina Code sections have therefore been modified in this act since all the security interests covered by these special provisions would be governed by the transmitting utility provisions which contain less onerous filing provisions than the existing statutes. See Section 8(18) of this act and the South Carolina Reporter's Notes to Sections 36-9-302, 36-9-402, and 36-9-403. The intent of subsections (2) and (3) is that all filings made pursuant to the cited sections prior to the effective date of the 1988 UCC amendments would continue to be valid without further action until they expired or were satisfied. The wording in the official text version of subsection (3) is modified as shown in order to cover special problems presented by Section 36-9-403(4) dealing with South Carolina public utilities and subsection (4) covers a case where an ordinary continuation statement cannot be filed because the original filing was a NON-UCC or was a UCC filing in a different filing office. The concept of financing statements rather than the concept of continuation statements was used for these fact situations. This subsection also covers a case where a pre-UCC security interest has been renewed under the old chattel mortgage renewal provisions in Section 60-306 of the 1962 South Carolina Code pursuant to Section 36-10-102. Any further renewals of such security interests
after the effective date of the 1988 UCC Amendments will have to comply with this subsection.
  "Section 36-11-107. Transition provisions as to priorities.
  Except as otherwise provided in this Chapter 11, the 1966 UCC applies to any questions of priority if the positions of the parties were fixed prior to the effective date of the 1988 UCC
Amendments. In other cases questions of priority
are determined by the 1988 UCC Amendments."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  Most questions of priority can be broken down to questions between two parties, and the rule is that the 1988 UCC Amendments apply to resolve these questions unless the rights of both parties were fixed under the 1966 UCC.
  If a commercial creditor acquires knowledge of an unfiled security interest before the effective date of the 1988 UCC Amendments, but gets his judgment after such effective date, the rule in Section 9-301 of the 1972 Text governs, since he has no rights until after judgment and levy. Under Section 9-301(1)(b) of the 1972 Text, the creditor's knowledge of the unperfected security interest is irrelevant, whereas under the 1962 Text (see existing Section 36-9-301(1)(b) of the 1976 South Carolina Code), such knowledge would prevent the judgment creditor from taking priority over the unperfected security interest.
  "Section 36-11-108. Presumption that rule of law continues unchanged.
  Unless a change in law has clearly been made, the provisions of the 1988 UCC Amendments are considered declaratory of the meaning of the 1966 UCC."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  This asserts that the 1988 UCC Amendments are declaratory, except where a change is clearly intended. This is an effort to minimize transitional problems. This provision should also be helpful to courts in determining the intent of the 1962 Text in litigation that is not governed by the 1972 Text. As is pointed out in the introduction, a great many of the modifications in the 1972 Text are merely clarifications of the original intent of the 1962 Text rather than changes in position or outcome on specific issues. A court can quite properly utilize these "clarifications" as authority in deciding these pre-1972 UCC cases. See, e.g., Massey-Ferguson Credit Corp. v. Wells Motor Co., Inc., 27 UCC Rep. 267, 272 (Ala, Sup. Ct. 1979).
Various 1976 Code sections amended
SECTION 8. The following provisions of the 1976 Code are amended as follows:
  (1) Section 15-3-520 of the 1976 Code is amended to read:
  "Section 15-3-520. Within twenty years:
      (a) an action upon a bond or other contract in writing secured by a mortgage of real property;
      (b) an action upon a sealed instrument, other than a sealed note and personal bond for the payment of money only whereon the period of limitation is the same as prescribed in Section 15-3-530, except that a sealed contract for sale or an offer to buy or sell goods whereon the period of limitation is the same as prescribed in Section 36-2-725."
  (2) Section 29-3-310 of the 1976 Code is amended to read:
  "Section 29-3-310. Any person who has received full payment or satisfaction or to whom a legal tender has been made of his debts, damages, costs, and charges secured by mortgage of real estate shall, at the request of the mortgagor or of his legal representative or any other person being a creditor of the debtor or a purchaser under him or having an interest in any estate bound by the mortgage and on tender of the fees of office for entering satisfaction, within three months after the request is made, enter satisfaction in the proper office on the mortgage which shall forever thereafter discharge and satisfy the mortgage."
  (3) Section 29-3-330 of the 1976 Code is amended to read:
  "Section 29-3-330. Any mortgage, deed of trust, or other written instrument securing the payment of money and being a lien upon real property may be cancelled, discharged, and released by any of the following methods:
  (a) The mortgagee or other person being the owner or holder of the mortgage, as appears by the record of the instrument or any assignment of the instrument, or the legal representative or attorney in fact, under a written instrument duly recorded, of the holder of the instrument, may exhibit the instrument to the officer or his deputy who has charge of the recording of the
instrument and then in the presence of the officer or his deputy write across the face of the record of the instrument the words 'The debt secured is paid in full and the lien of this instrument is satisfied', or words of like meaning and date the notation and sign it, the signature to be witnessed by the officer or his deputy;
  (b) The satisfaction of the mortgage, deed of trust, or other instrument securing the payment of money and being a lien upon real property may be written upon or attached to the original instrument and executed by any person above named in the presence of one or more witnesses, in which event the satisfaction must be recorded across the face of the record of the original instrument; or
  (c) In case the original mortgage, deed of trust, or other instrument securing the payment of money and being a lien upon real property has been lost or destroyed it may be satisfied, either by the owner and holder of the instrument in person or his personal representative or duly authorized attorney in fact, by an instrument in writing duly executed in the presence of two witnesses and probated, and in addition the person executing the satisfaction shall make an affidavit that he or the person he represents is at the time of the satisfaction a bona fide owner and holder of the mortgage, deed of trust, or other instrument securing the payment of money and being a lien upon real property and that has not been assigned, hypothecated, or otherwise disposed of. The affidavit must be recorded along with the satisfaction. The maker of any affidavit which is false is guilty of perjury and punished as by law provided for the punishment of perjury."
  (4) Section 29-3-340 of the 1976 Code is amended to read:
  "Section 29-3-340. The recording officer or his deputy shall enter on the original mortgage, deed of trust, or other instrument securing the payment and being a lien upon real property when it is produced before him a certificate that a satisfaction has been entered of record and the date of the entry."
  (5) Section 29-3-350 of the 1976 Code is amended to read:
  "Section 29-3-350. All registers of mesne conveyances and all clerks of court in counties in which clerks are required to perform the duties of registers of mesne conveyances shall enter the word 'cancelled,' together with the signature of the officer, upon the margin or across the indexes of real estate mortgages when any real estate mortgage is duly cancelled of record by the mortgagee or his assignee. The cancellation and signature must be entered in the margin opposite the names of the mortgagor and mortgagee, respectively, or across the names. A like cancellation must, on the demand of the mortgagor or legal representative, be made on mortgages heretofore cancelled of record. Upon the failure of the register of mesne conveyances or clerk of court to comply with this section he shall in each instance forfeit and pay to the mortgagor the sum of ten dollars, to be recovered in any court of competent jurisdiction.
  Any clerk or other officer wilfully violating this section must, on conviction, be fined not more than one hundred dollars or be imprisoned not more than thirty days, in the discretion of the court, and the solicitor of each circuit shall see that the law is complied with or shall immediately prosecute violators."
  (6) Section 29-3-360 of the 1976 Code is amended to read:
  "Section 29-3-360. Any person who is indebted by mortgage on real estate may apply to the presiding judge or any court of general sessions and common pleas to be held in the county in which the mortgage on real estate is recorded for a rule to show cause why satisfaction must not be entered thereon."
  (7) Section 29-3-390 of the 1976 Code is amended to read:
  "Section 29-3-390. When the debt or any other obligation secured by any mortgage on real estate has been fully paid, released, satisfied, discharged, or extinguished or when the lien of any mortgage on real estate has been released, discharged, or extinguished and for any reason the mortgage or the record of the mortgage in the office of the register of mesne conveyances or clerk of court has not been satisfied and cancelled, the mortgagor or his legal representatives may, upon a verified petition against the mortgagee, his legal representatives, assignees, pledgees of record, and any other person having any right, title, or interest in or lien upon the mortgage, reciting the facts and circumstances in relation to the mortgage and the satisfaction, release, discharge, or extinguishment of the debt or obligation secured thereby or of the lien thereof, apply to the court of common pleas or any judge of the Court of Common Pleas in open court or at chambers for a rule to show cause why an order should not be granted directing that the mortgage or record of the mortgage be satisfied and cancelled of record."
  (8) Section 29-3-400 of the 1976 Code is amended to read:
  "Section 29-3-400. Upon the filing of the petition in the office of the clerk of the court of common pleas, the clerk shall immediately enter it in the index to lis pendens affecting real property and from the time of the filing the pendency of the action or special proceedings is constructive notice to an assignee, pledgee, purchaser, or encumbrancer of the mortgage, and every person whose purchase, encumbrance, assignment, pledge, or hypothecation is subsequently executed or subsequently recorded is considered a subsequent purchaser or encumbrancer and is bound by all proceedings taken after the filing of the petition to the same extent as if he were made a party to the action or special proceeding. The filing of the petition is of no avail unless it is followed by the first publication of the rule or by the personal service thereof on a respondent within sixty days after the filing."
  (9) Section 29-3-470 of the 1976 Code is amended to read:
  "Section 29-3-470. Nothing provided in this title prevents the release of a portion of any mortgaged interest in real property from the lien of the mortgage by any instrument in writing duly executed in the presence of one or more witnesses and duly probated, the release to be executed by the owner or holder of the lien or his duly authorized representative as will appear by the record of the original instrument or of any assignment thereof. If the release is written upon or attached to the original mortgage no probate thereof is required."
  (10) Section 30-5-30 of the 1976 Code is amended to read:
  "Section 30-5-30. Except as otherwise provided by statute, before any deed or other instrument in writing can be recorded in this State:
    (1) The execution of the deed or other instrument must be first proved by the affidavit of a subscribing witness to the instrument, taken before some officer within this State competent to administer an oath. If the affidavit is taken without the limits of this State, it may be taken before:
      (a) a commissioner appointed by dedimus issued by the clerk of the court of common pleas of the county in which the instrument is to be recorded,
      (b) a commissioner of deeds of this State,
      (c) a clerk of a court of record who shall make certificate of the deed or other instrument under his official seal,
      (d) a justice of the peace who shall append to the certificate his official seal,
      (e) a notary public who shall affix to the deed or other instrument his official seal within the State of his appointment, which is a sufficient authentication of his signature, residence, and official character,
      (f) before a minister, ambassador, consul general, consul, or vice-consul, or consular agent of the United States of America, or
      (g) in the case of any officer or enlisted man of the United States Army, Air Force, Navy, Marine Corps, or Coast Guard on active duty outside the State or any civilian employee of any such organization on active duty outside the continental confines of the United States, any commissioned officer of the Army, Air Force, Navy, Marine Corps, or Coast Guard, if the probating officer states his rank, branch, and organization;
    (2) The Uniform Recognition of Acknowledgments Act must be complied with; or
    (3) The person executing it shall submit an affidavit subscribed to before a person
authorized to perform notarial acts herein or by the Uniform Recognition of Acknowledgments Act that the signature on the deed or other instrument is his signature and that the instrument was executed for the uses and purposes stated in the instrument."
  (11) Section 30-7-10 of the 1976 Code is amended to read:
  "Section 30-7-10. All deeds of conveyance of lands, tenements, or hereditaments, either in fee simple or for life, all deeds of trust or instruments in writing conveying estate, creating a trust in regard to the property, or charging or encumbering it, all mortgages or instruments in writing in the nature of a mortgage of any real property, all marriage settlements, or instruments in the nature of a settlement of a marriage, all leases or contracts in writing made between landlord and tenant for a longer period than twelve months, all statutory liens on buildings and lands for materials or labor furnished on them, all statutory liens on ships and vessels, all certificates of renunciation of dower, all contracts for the purchase and sale of real property, all assignments, satisfactions, releases, and contracts in the nature of subordinations, waivers, and extensions of landlords' liens, laborers' liens, sharecroppers' liens, or other liens on real property created by law or by agreement of the parties and generally all instruments in writing conveying an interest in real estate required by law to be recorded in the office of the register of mesne conveyances or clerk of court in those counties where the office of the register of mesne conveyances has been abolished or in the office of the Secretary of State delivered or executed after July 31, 1934, except as otherwise provided by statute, are valid so as
to affect the rights of subsequent creditors (whether lien creditors or simple contract creditors), or purchasers for valuable consideration without notice, only from the day and hour when they are recorded in the office of the register of mesne conveyances or clerk of court of the county in which the real property affected is situated. In the case of a subsequent purchaser of real estate, or in the case of a subsequent lien creditor on real estate for valuable consideration without notice, the instrument evidencing the subsequent conveyance or subsequent lien must be filed for record in order for its holder to claim under this section as a subsequent creditor or purchaser for value without notice, and the priority is determined by the time of filing for record."
  (12) Section 30-7-60 of the 1976 Code is amended to read:
  "Section 30-7-60. Except as otherwise provided by statute, assignments, satisfactions, releases, and contracts in the nature of subordinations, waivers, and extensions of landlords' liens, laborers' liens, sharecroppers' liens, and other liens on personal property, created by law or by agreement of the parties, contracts in the nature of subordinations, waivers, and extensions of liens on real property, created by law or by agreement of the parties, made or entered into by the original mortgagee, lien creditor, or trustee, or his legal representative or any assignee under an assignment recorded as herein or otherwise provided, are good and effectual, both in law and in equity, for the protection of any subsequent purchaser for a valuable consideration of the property affected by the mortgage or other instrument or lien created by
law or any subsequent creditor obtaining a lien upon the property, notwithstanding any other assignment, transfer, satisfaction, release, subordination, waiver, or extension contract of the mortgage or other lien, or the obligation secured thereby, unless the other assignment, satisfaction, release, subordination, waiver, or extension contract of the mortgage or other lien or the obligation secured thereby, has been recorded as herein or otherwise provided or the purchaser or creditor has had actual notice thereof before the purchaser or lien creditor acquired any interest in or lien upon the property so encumbered."
  (13) Section 30-7-70 of the 1976 Code is amended to read:
  "Section 30-7-70. Except as otherwise provided in Chapter 9, Title 36 or by other applicable provisions of law, liens on personal property required to be recorded in the office of the register of mesne conveyances or clerk of court in those counties where there is no office of the register of mesne conveyances must be witnessed and probated in the manner required for the execution of deeds and must be recorded and indexed in a book entitled Miscellaneous Liens on Personal Property. A separate index showing the name of the lienor and lienee must be maintained for each separate type of lien recorded in this book. The recording officer is entitled to the same fees as are provided for recording of deeds of equal length."
  (14) Section 30-7-80 of the 1976 Code is amended to read:
  "Section 30-7-80. Except as otherwise provided by statute, the recordation of the assignments, satisfactions, releases, contracts in the nature of subordinations, waivers, and extensions of
chattel mortgages or other instruments conveying an interest in or creating a lien on personal property must be upon the record of the recorded mortgage or other written instrument, except that the instrument may be recorded elsewhere in the book for the recordation of mortgages should there be no place upon the record of the recorded mortgage or other written instrument sufficient for the recordation of the assignment, satisfaction, release, contract in the nature of subordination, waiver, or extension of the lien, in which event there must be entered on the margin of the recorded mortgage or other written instrument whose assignment, satisfaction, release, contract in the nature of subordination, waiver, or extension has been thus recorded elsewhere an appropriate reference to the recordation, giving the names of the parties to the recordation, the date, and the book and page where the instrument is recorded. In any county where the records are photographed, microphotographed, or filmed, and there is no place upon the record of the recorded mortgage or other written instrument, or upon the margin of the recorded mortgage or other written instrument sufficient for the recordation of the assignments, satisfactions, releases, contracts in the nature of subordinations, waivers, and extensions of chattel mortgages or other instruments, the documents may be separately recorded as other instruments, and notation of the place of the recordation must be entered on the index for the mortgage or other written instrument or in a legible manner in the jacket or other container for the photograph, microphotograph, or film. Any assignment, satisfaction, release, contract in the nature of subordination, waiver, or extension of a chattel mortgage or other instrument conveying an interest in or creating a lien on personal property, to be entitled to be recorded as herein provided must be in
writing and witnessed, as mortgages of personal property are required to be witnessed and not probated when it is upon the original mortgage or other instrument itself, but when it is upon a separate piece then it must be probated in the same way as is required for the probating of mortgages of personal property."
  (15) Section 30-9-30 of the 1976 Code is amended to read:
  "Section 30-9-30. Except as otherwise provided by statute, each clerk of court and register of mesne conveyances in this State shall keep a record in his office in which he shall file all conveyances, mortgages, liens, contracts, and papers relating to real and personal property required by statute to be kept by him, by entering in the record the names of the grantor and grantee, mortgagor and mortgagee, obligor and obligee, date of filing and nature of the instrument immediately upon its lodgment for record. The filing is notice to all persons, sufficient to put them upon inquiry of the purport of the instrument so filed and the property affected by the instrument."
  (16) Section 30-9-40 of the 1976 Code is amended to read:
  "Section 30-9-40. The register of mesne conveyances or clerk of court in those counties where the office of the register of mesne conveyances has been abolished shall immediately upon the filing for record of any deed, mortgage, or other written instrument of the character mentioned in Section 30-7-10 or Chapter 9 of Title 36 enter it upon the proper indexes in his office, which constitute an integral, necessary, and inseparable part of the recordation of the deed, mortgage, or other written instrument for any and all purposes
whatsoever, and this shall likewise apply to any copy of the indexes made subsequently by the register of mesne conveyances or clerk of court, or the deputy of either, or by his authority for the purpose of replacing the original indexes. The entries in the indexes required to be made are notice to all persons sufficient to put them upon inquiry as to the purport and effect of the deed, mortgage, or other written instrument so filed for record, but the recordation of a deed, mortgage, or other written instrument is not notice as to the purport and effect of the deed, mortgage, or other written instrument unless the filing of the instrument for record is entered as required in the indexes."
  (17) Section 30-11-20 of the 1976 Code is amended to read:
  "Section 30-11-20. Mortgages or deeds of trust covering the whole or any part of the real property of a railroad company and the appurtenant franchises are valid so as to affect from the time of their execution and delivery the rights of all subsequent creditors and purchasers, when filed within forty days from the execution and delivery of the mortgages or deeds of trust in the office of the Secretary of State. Within six months thereafter the mortgages or deeds of trust must be recorded also in the books provided for the recording of mortgages on real estate in the office of clerk of court or register of mesne conveyances of each county in which any part of the real property affected by the mortgages or deeds of trust is situated. The mortgages or deeds of trust, if so filed in the office of the Secretary of State subsequent to the expiration of the period of forty days and also recorded in the books provided for the recording of mortgages on real estate in the office of the clerk of court or register of mesne conveyances
subsequent to the expiration of the period of forty days are valid to affect the rights of all subsequent creditors and purchasers from the date of the record. Before any mortgage or deed of trust covering property of a railroad company and the appurtenant franchises can be filed by the Secretary of State, copies of the mortgage or deed of trust must be furnished in duplicate, one of which must be given its proper file number, indexed, and retained in his office, and the other must be properly endorsed, giving the file number under which it is to be found and returned.
  Nothing contained in this section may be construed to affect the provisions of Section 58-15-920.
  The provisions of this section do not in any way affect any mortgage or deed of trust covering property of a railway company and the appurtenant franchises executed and filed or recorded prior to March 22, 1937."
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
  When the South Carolina Legislature adopted the Uniform Commercial Code in 1966, instead of adopting a specific repealer section containing a laundry list of statutes repealed as recommended by the Official Text of the UCC, and by Professor Robert W. Foster of the University of South Carolina Law School, who acted as the South Carolina Reporter for the UCC and prepared an initial list of such statutes which has been modified and updated in this study, the legislature enacted a general repealer section (Section 36-10-103) which merely stated: "All acts and parts of acts inconsistent with this act are hereby repealed." The failure to enact
a specific repealer section has caused a number of legal uncertainties which need to be cleared up. For example, Section 27-23-80 of the 1976 South Carolina Code requires that agreements "between the vender and vendee or the bailor and bailee of personal property whereby the vender or bailor shall reserve to himself any interest in the property shall be null and void as to subsequent creditors (whether lien creditors or simple contract creditors), or purchases for a valuable consideration without notice, unless such agreement be reduced to writing and recorded in the manner provided by law for the recording of mortgages." The first question that arises is whether this statute is "inconsistent" with the Uniform Commercial Code and therefore repealed. Although arguments can be made on both sides of this issue, the better argument would appear to be that Section 27-23-80 is not inconsistent with the UCC at least to the extent that it deals with true leases and consignments of personal property, since the 1962 UCC which was the Text adopted in South Carolina only covers leases and consignments that are intended to create security interests in personalty. See Sections 36-9-102, and 36-1-201(37) of the 1976 South Carolina Code. This is the position taken by the Attorney General's office in 1970-71 Op. Att. Gen. No. 3201 at pg. 3201. See also In re Bazen, 425 F. Supp. 1184 (D.S.C.) aff'd, 571 F. (2d) 574 (14th Cir. 1977). If that is the case, the next issue is to determine the proper type and place of filing, assuming you have a true lease or consignment. Section 27-23-80 specifies that the "instrument" be filed in the place "provided by law for the recording of mortgages"; however, the UCC requires that only financing statements need be filed and for most leased items the appropriate place to file would be different from the proper place to file chattel mortgages. While most practitioners
have presumably been filing a financing statement in the appropriate office or offices specified by Section 36-9-401 it is far from clear that a court would uphold this procedure. See In re Bazen, supra. A further complicating factor is that a court might well view the filing of a financing statement as an admission that the transaction created a security interest, which could result in legal, tax, and accounting consequences quite different from the expectations of the parties. See In re Lakeshore Transit-Kenosha, Inc., 7 UCC Rep. 607 (E.D.Wis. 1969). In addition, it is important to note that Section 27-23-80 makes the transaction absolutely void as to all subsequent creditors in the event the proper filing is not made. In contrast to this, an unperfected but otherwise attached security interest under the UCC is still valid but is merely subordinated to a fully perfected security interest or other lien under Section 36-9-301. Because of the above problems it would seem that it would be highly desirable to repeal Section 27-23-80 even if it is not technically inconsistent with the UCC. Further comments on Section 27-23-80 are contained in paragraph (A)(1) of the Reporter's Notes to Section 9. In this connection, Section 36-9-408 of the 1988 UCC Amendments specifically authorizes the filing of a special financing statement in a case involving a lease or consignment. This section further provides that the filing will not be a factor in determining whether the lease or consignment is intended for security and therefore covered by Article 9 of the UCC, but if in fact it is determined that a security interest was intended, the filing of the financing statement will constitute perfection of the security interest. Note also that Section 36-2-326(3) and Section 36-9-114 of the 1981 UCC Amendments contain additional provisions for filing requirements as to consignments.
  The list of statutes included in Sections 8 and 9 of this act include all the South Carolina statutes that can reasonably be determined to be inconsistent with UCC. If the UCC treatment of a particular issue supersedes the pre-code statutes, the pre-code statute is repealed in its entirety. However, if only a portion of the pre-code statute is superseded, the pre-code statute is amended. Also included in this list are pre-code statutes which although they technically may not be "inconsistent" with the UCC, ought to be amended or repealed because their continued existence creates confusion and unnecessary uncertainty concerning the interplay between the UCC and other South Carolina laws. The South Carolina Bailment Statute, Section 27-23-80 of the 1976 South Carolina Code, discussed above, is one example of this type of statute. See Section 9(A)(1) of this act. Other examples of such statutes are Sections 27-39-50 and 27-39-260 of the 1976 South Carolina Code dealing with priorities of landlord's liens. (see Sections 9(A)(2) and 9(A)(3) of this act) and the last paragraph of Section 30-7-10 of the 1976 South Carolina Code, which deals with priority of a filed chattel security interest against a landlord's lien for rent (see paragraph (13) below of the Reporter's Notes to this section).
  When the 1976 South Carolina Code was enacted by the Legislature, many statutes in the 1962 South Carolina Code that were obviously inconsistent with the 1966 UCC were not made a part of the 1976 Code but were listed as being impliedly repealed. In order to clear up any question about these statutes, however, they are officially repealed in Section 9(B) of this act. In addition several provisions in the 1962 Code that should have been designated as having been repealed by implication were included in the 1976 Code. These statutes are Sections 33-9-130, 30-6-160, 30-5-170, 56-19-640, and
56-19-690. See Section 9(A) of this act. Finally there are several sections of the 1962 Code that provide special filing fees for certain counties that are different from the UCC filing fees provided in Part 4 of Article 9. These statutes, designated as local statutes, were not included in the 1976 Code and technically continue to be effective. Because of their inconsistency with the UCC filing fees, these local statutes are repealed. See Section 9(B) of this act.
  An additional justification for enacting a specific repealer at this time is to provide a means of tracing these repealed and amended statutes for persons researching legal problems which involve such statutes. For example, some pre-code filed chattel mortgages are still valid and can be enforced under the old chattel mortgage statutes (See the Reporter's Notes to Section 36-10-102 supra).
  When South Carolina adopted the UCC in 1966 it included a special provision that exempted security interests in property belonging to railroads from the filing requirements of Article 9. See Section 36-9-302(3)(b) of the 1976 South Carolina Code. Such security interests are perfected by complying with Section 30-11-20 of the South Carolina Code. Since the provisions dealing with perfection of security interests against transmitting utilities contained in the 1972 Text of the UCC apply to railroads and these provisions impose fewer filing requirements than Section 30-11-20, Section 36-9-302(3)(b) has been revised to omit this exemption. See the South Carolina Reporter's Notes to Section 36-9-302. Section 30-11-20 has also been amended to delete any reference to personal property. See subsection (19) of this Section 8. All prior filings made pursuant to Section 30-11-20 remain valid. See the South Carolina Reporter's Notes to Section 36-11-106. Finally, because of the
repeal of the statutes requiring chattel mortgage books to be continued, there is a need for a special filing book for recording miscellaneous liens such as landlords', laborers', and sharecroppers' liens currently recorded in the chattel mortgage books. A statute requiring that a book and index for this purpose entitled "Miscellaneous Liens on Personal Property" is provided in amended Section 30-7-70. See subsection (15) of this Section 8.
REPORTER'S NOTES TO PARTICULAR SECTIONS OF
THE 1976 CODE AMENDED IN SECTION 8
  Detailed notes on each of the provisions in the 1976 Code that are amended by this act follow below. Reporter's Notes on the 1976 and 1962 South Carolina Code provisions that are repealed are found in Section 9.
  1. Uniform Commercial Code Section 36-2-203 eliminates the effects of a sealed instrument with respect to contracts for the sale of goods. Section 15-3-520 of the 1976 South Carolina Code, which creates a twenty-year statute of limitations for an action upon a sealed instrument, should expressly exclude sales contracts from its coverage in order to make it clear that the Uniform Commercial Code statute of limitation of six years prescribed by UCC Section 36-2-725 would apply.
  2. Section 29-3-310 of the 1976 South Carolina Code imposes an obligation on a mortgagee to enter a satisfaction of record of all mortgages after payment within three months after demand made by the mortgagor. Section 36-9-404(1) sets out the procedure and duty of the secured party to issue a termination statement when there is no longer an outstanding secured obligation. The reference to personal property in Section 29-3-310 is deleted by the amendment, thereby eliminating the overlap.
This statute will continue in effect for real property mortgages.
  3. Section 29-3-330 of the 1976 South Carolina Code prescribes the methods of entering satisfaction of any mortgage instrument. Uniform Commercial Code Section 36-9-404(2) sets out the method of terminating a security interest of record in personalty. The amendment to Section 29-3-330 deletes the reference to chattel mortgages, thereby eliminating the overlap. This statute will continue to govern the procedure for entering satisfaction of real property mortgages.
  4. Section 29-3-340 of the 1976 South Carolina Code requires the recording officer, upon production of a certificate that a satisfaction of a mortgage has been entered, to enter a satisfaction on the original mortgage. It applies to mortgages of all types of property. The amendments to Section 29-3-340 limit the applicability of the section to real property mortgages. Section 36-9-404 sets out the procedure for satisfying security interests in personalty.
  5. Section 29-3-350 of the 1976 South Carolina Code requires the filing clerks to enter cancellation of all mortgages on the indexes. The amendment to Section 29-3-350 deletes the reference to chattel mortgages, which are now treated as security agreements under the UCC. This section will continue to apply to real estate mortgages. Section 36-9-404(2) will govern the termination of record notice of a security interest in personalty.
  6. Section 29-3-360 of the 1976 South Carolina Code sets out a procedure for a rule to show cause why satisfaction should not be entered on a recorded mortgage. The amendment to Section 29-3-360 limits this remedy to real estate mortgages leaving to Section 36-9-404(1) the sanctions for the failure of the secured
party of record to issue a termination statement after demand following payment of the debt.
  7. Section 29-3-390 of the 1976 South Carolina Code sets out an alternative procedure for issuing a rule to show cause why satisfaction should not be entered of record. Since the remedy of Section 36-9-404(1) for failure to issue a termination statement covering a satisfied personal property security interest is exclusive, the amendment to this Section 29-3-390 leaves it applicable only to real property mortgages.
  8. Section 29-3-400 of the 1976 South Carolina Code requires the clerk to file lis pendens notice upon the filing of the petition for a show cause order for satisfaction of a mortgage. Since the remedy in Section 36-9-404(1) with respect to a security interest in personalty is exclusive, the reference to personal property in the lis pendens statute is deleted.
  9. Section 29-3-470 of the 1976 South Carolina Code requires a formal probate for the release of collateral. As far as personalty is concerned, releases are governed by Section 36-9-406. Section 29-3-470 is therefore amended to restrict its application to real property.
  10. Sections 30-5-30, et seq. of the 1976 South Carolina Code set out the requirements for recording of various instruments. These sections were enacted prior to the adoption of the UCC or the title provisions relating to automobiles (Sections 56-19-10, et seq. of the 1976 South Carolina Code) and watercraft (Sections 50-23-10, et seq. of the 1976 South Carolina Code). The recording requirements of these latter statutes are different from the recording requirements of more traditional instruments such as mortgages and deeds. Section 30-5-30 of the 1976 South Carolina Code and other similar statutes are amended to eliminate this overlap and inconsistency.
Section 30-5-30 specifically deals with acknowledgement or probate requirements for recorded instruments. One of the fundamental purposes of the UCC is to simplify the law governing commercial transactions by removing formal or technical requirements which no longer serve any useful purpose and may operate to penalize a person who inadvertently fails to comply with the statutory niceties. The requirement of an acknowledgement or probate as a prerequisite to the recording of an instrument under Section 30-5-30 of the 1976 South Carolina Code is the type of requirement which the UCC abandons "in the interest of a simplified and workable filing system". See Official Comment 3 to Section 36-9-402.
  11. Section 30-7-10 of the 1976 South Carolina Code is the general recording statute applicable to both real and personal property. Since Article 9 of the Uniform Commercial Code generally governs personal property security transactions, the amendments to Section 30-7-10 are designed to eliminate any reference to recording of security interests in personal property thereby avoiding any inconsistency with Article 9. The last paragraph of Section 30-7-10 grants a five-day grace period for the filing of a security interest in certain chattels as against the lien of a landlord for rent on the same collateral. While this provision may not be technically inconsistent with any of the provisions of the Uniform Commercial Code, it along with Sections 27-39-50 and 27-39-260, which also deal with landlords' liens, are deleted and/or repealed as being obsolete. See also Section 9(A)(2) and (A)(3) of this act.
  12. Where a lien interest of any kind is assigned, released, satisfied, subordinated, etc., Section 30-7-60 of the 1976 South Carolina Code protects a subsequent purchaser of the collateral or creditor of the debtor from the
claims of the assignee unless the assignment is recorded. Recording of the assignment will, however, subject such purchaser or creditor to the claims of the assignee. So far as these rules apply to a security interest governed by Article 9 of the Uniform Commercial Code, there is an overlap and some inconsistency. Section 36-9-302(2) provides that the perfection of a security interest continues to be effective as against creditors of the purchasers from the original creditor even after assignment by the secured party. Also, Section 36-9-405 sets up a permissive procedure by which the assignment of a security interest may be noted of record and thus inquiries concerning the transaction will be addressed to the assignee. Therefore, Section 30-7-60 is revised to make it clear it does not apply to security interests covered by Article 9 of the UCC. As amended this statute will continue to be applicable to liens created by other statutes such as landlords' and laborers' liens and all lien interests in real property, since these are not governed by the UCC. See also paragraph 15 below.
  13. Section 30-7-70 has been amended in order to provide for the filing and indexing of landlord, laborers, and other infrequent and miscellaneous liens that are currently filed in the chattel mortgage books which under the provisions of this act will no longer be utilized. The former provisions of Section 30-7-70 set forth the requirements for assignments, satisfactions, etc., of various miscellaneous liens that have been indexed in the chattel mortgage books. The creation of a new Miscellaneous Lien Filing Book pursuant to the revised provisions of Section 30-7-70 make its former provisions obsolete.
  14. Section 30-7-80 of the 1976 South Carolina Code prescribes the method of recordation of assignments, satisfactions, releases, etc., of security interests. The amendment to this
section excludes any security interests in personal property which are governed by Article 9 of the UCC (see especially Section 36-9-405), and assignments, etc., covered by the motor vehicle (Sections 56-19-10, et seq. of the 1976 South Carolina Code) and watercraft (Sections 50-23-10, et seq. of the 1976 South Carolina Code) title statutes.
  15. Section 30-9-30 of the 1976 South Carolina Code sets forth the general requirements for filing and indexing of locally recorded documents. The amendments to this section are designed to avoid any possible conflict with the filing and indexing provisions of Article 9 of the Uniform Commercial Code. See especially Section 36-9-403(4).
  16. Section 30-9-40 of the 1976 South Carolina Code, providing for the indexing of instruments filed for record, refers to Section 30-7-10 of the 1976 South Carolina Code, the general recording statute, as to the types of instruments covered by this section. Section 30-7-10 of the 1976 South Carolina Code has been amended to exclude from its coverage an instrument conveying a security interest in personalty, since such instruments would be governed by the UCC (see paragraph 13 above). It is therefore necessary to expressly include reference to Article 9 of the UCC in this section so that the indexing provisions of Section 30-9-40 will be consistent with those in Section 30-7-10 and the UCC.
  17. Section 30-11-20 which contains special filing rules for obtaining perfected liens against railroad property has been amended to delete any reference to personal property as security interests against personal property of railroads will be covered by the transmitting utility provisions of the 1988 UCC Amendments.
Code sections reported
SECTION 9. (A) The following sections of the 1976 Code are repealed:
    (1) Section 27-23-80;
    (2) Section 27-39-50;
    (3) Section 27-39-260;
    (4) Section 30-5-160;
    (5) Section 30-5-170;
    (6) Section 33-9-130;
    (7) Section 56-19-640;
    (8) Section 56-19-690.
  (B) The following sections of the 1962 Code are repealed:
    (1) Section 8-181 through 8-200,
      inclusive;
    (2) Sections 8-211 through 8-215,
      inclusive;
    (3) Section 8-801 through 8-1076,
      inclusive;
    (4) Sections 8-1081 through 8-1108,
      inclusive;
    (5) Section 11-103;
    (6) Sections 11-201 through 11-206,
      inclusive;
    (7) Sections 12-17.1 through 12-17.25,
      inclusive (Chapter 7 of Act 847 of
      1962);
    (8) Section 27-56.1;
    (9) Section 27-61.1;
    (10) Section 27-62;
    (11) Section 27-63;
    (12) Section 27-64;
    (13) Section 27-64.1;
    (14) Section 27-64.2;
    (15) Section 27-65;
    (16) Section 27-66.1;
    (17) Section 45-151;
    (18) Section 45-152;
    (19) Section 45-158;
    (20) Section 45-161;
    (21) Section 45-162;
    (22) Section 45-163;
    (23) Section 45-164;
    (24) Sections 45-201 through 45-211,
      inclusive;
    (25) Sections 45-401 through 45-410,
      inclusive;
    (26) Section 60-64.1;
    (27) Section 60-301;
    (28) Section 60-302;
    (29) Section 60-302.1;
    (30) Section 60-303;
    (31) Section 60-304;
    (32) Section 60-305;
    (33) Section 60-306;
    (34) Section 60-306.1;
    (35) Section 60-307;
    (36) Section 60-308;
    (37) Section 60-309;
    (38) Section 60-310;
    (39) Section 60-311 (Act 712 of 1962);
  (C) All other acts, parts of acts, or provisions of the 1976 Code which are inconsistent with this act are repealed.
OFFICIAL COMMENT
  None.
SOUTH CAROLINA REPORTER'S NOTES
INTRODUCTION
(See the Introductory Note to Section 8)
  (A) The Reporter's Notes which follow discuss the statutes in the 1976 Code that are repealed in Section 9(A) of this act.
  1. Section 27-23-80 of the 1976 South Carolina Code is the South Carolina "Bailment Statute" requiring the recording of certain bailment transactions in order for an interest reserved by the bailor or vender of goods to be effective against subsequent creditors or
purchasers for value without notice from the bailee in possession. One of the historical purposes of this section was to insure the requirement of recording in order for the reserved security interest of a conditional sale vendor to be effective against third parties since the general recording statute, Section 30-7-10 of the 1976 South Carolina Code, referred only to mortgages. The Uniform Commercial Code does not, however, make any distinctions based on the form of the security instrument and thus the filing requirements apply with equal effect to the conditional sale and the chattel mortgage type of arrangement if a security interest is intended. See Sections 36-9-102 and 36-1-201(37) of the 1976 South Carolina Code. A second application of this statute was to require the recording of public notice of a personal property lease so as to give notice to the lessee's subsequent creditors. See e.g., Andrews v. Hurst, 163 S.C. 86, 161 S.E. 331 (1931). As such the statute is akin to antisecret lien and fraudulent conveyance statutes. In practice, however, the recording requirement in cases involving true leases has proved to be a trap for the unwary due primarily to the illogic of recording a true lease of personal property and the absence of similar statutes in other states.
  A third application of the Bailment Statute has been to require a recording in order for a consignor to claim against the consignee's creditors. Section 36-2-326, however, requires filing under Article 9 in order for a "consignment" security transaction to be effective against claims of third parties. See also Sections 36-9-114 and 36-9-408 of the 1981 UCC Amendments.
  As is pointed out in the Introduction of the South Carolina Reporter's Notes to Section 8, this statute may in many respects be inconsistent with the Uniform Commercial Code
and in any case it is obsolete and ought to be repealed. In this connection, a new article of the UCC dealing with equipment leasing is under consideration. See 1 Bus. Law. Memo No. 5 May, 1981, page 3. If approved for adoption by the State, the South Carolina Legislature should at that time consider it for adoption.
  2. Section 27-39-50 of the 1976 South Carolina Code gives a landlord the right to recover one year's accrued but unpaid rent as a prerequisite to removal of any "goods or chattels…taken by virtue of an execution or any pretense whatsoever…" It is not clear from reading this section whether it is restricted to cases involving execution or levy after obtaining a judgment on an unsecured debt or could also apply to any type of foreclosure proceeding against personal property and there are not cases which give a definite answer to this issue. If the latter interpretation were to be adopted, it would be inconsistent with the UCC's philosophy of protecting the priority of a secured party, even one with an unperfected security interest in the collateral, against anyone but a lien creditor, and a landlord has no lien on any property until after distress and levy. See Sections 36-9-201, 36-9-301, and 36-9-312, and especially 36-9-501(5) which specifically allows the secured party to obtain a judgment and execute and levy on the collateral as a means of foreclosure. See also Burnett v. Boukedes, 240 S.C. 144, 125 S.E. 2d 10, 14-15 (1962). Further, while there may have been some justification for such a statute when this country had basically an agrarian economy, its operation in the modern commercial world would unnecessarily impair the rights of secured parties to enforce security interests and is contrary to the expectations of financers and debtors of personal property. The real effect of the statute is to give a landlord an
unexpected windfall in the event a secured party attempts to foreclose on a security interest.
  3. The ostensible purpose of Section 27-39-260 of the 1976 South Carolina Code is to determine the priority between a landlord with a distress lien for unpaid rent and a secured party with a security interest in the property distressed. The original version of this statute was enacted in 1712 as part of a general bill adopting several English statutes; and the present version is basically the same as was enacted in 1899. See Fidelity Trust & Mortgage Co. v. Davis, 158 S.C. 400, 155 S.E. 622 (1930). On the surface this statute, which was last extensively revised by Act 106 of 1977, appears to indicate a reasonable rule: the landlord's distress lien in property that is collateral under a security interest takes priority over the security interest unless the security interest is perfected (1) before the effective date of the lease or (2) before the property is "brought upon the rented premises". If either of these circumstances exist then the landlord must satisfy the security interest before the distress lien on the property in question is effective. If the security interest attaches subsequent to the effective date of the lease and after the collateral is located on the leased premises, however, then the landlord's distress lien takes priority over the security interest even though the security interest is perfected before the landlord obtains a distress lien. See Brunswick Corp. v. Long, 392 F. 2d 337 (4th Cir. 1968); Frady v. Smith, 247 S.C. 353, 147 S.E. 2d 412 (1966). The landlord will take priority in this situation even though he has knowledge of the security interest. See Frady v. Smith, supra. The net effect is that a large number of fully perfected nonpurchase money security interests are potentially subordinate to distress liens. This is inconsistent with the priority rules in the
UCC. Section 36-9-301(1) states that a perfected security interest takes priority over any lien creditor unless the creditor obtains a lien before the security interest is perfected; and a landlord cannot qualify as a lien creditor until after distress and levy (See Burnett v. Boukedes, 240 S.C. 144, 125 S.E. 2d 110, 14-15 (1962).
  4. Sections 30-5-160 and 30-5-170 of the 1976 South Carolina Code require that separate sets of books and indexes be kept for real estate mortgages and chattel mortgages. Section 60-64.1 of the 1962 Code, which is officially repealed by Section 9(B)(26), also deals with this subject matter. Under the Uniform Commercial Code the only instrument that is required to be recorded to perfect a security interest in any type of personalty covered by Article 9 is a financing statement which is to be recorded and indexed in accordance with Part 4 of Article 9 (see Section 36-9-401 et seq. of the 1976 South Carolina Code). Thus provisions in the South Carolina Code which refer to chattel mortgages or recording of chattel mortgages as far as transactions covered by Article 9 are concerned are obsolete and inconsistent with the Uniform Commercial Code filing provisions. Cf. 1967-68 Op. Att. Gen. No. 2443 at pg. 100. Even though the statutory provisions relating to chattel mortgages are repealed, this would not prevent the renewal of a chattel mortgage recorded prior to January 1, 1968, the effective date of the UCC in South Carolina, since pursuant to Section 36-10-101 of the 1976 South Carolina Code, all pre-code transactions continue to be governed by pre-code law. See the South Carolina Reporter's Notes to Section 36-10-102, supra, and 1967-68 Op. Att. Gen. No. 2450 at pg. 110. Sections 30-5-160 and 30-5-170, although repealed by this section, are repealed only insofar as transactions entered into after December 1, 1967, are concerned. See
also Section 36-11-106(3) and the South Carolina Reporter's Notes in Section 7 of this act. Finally, note that Sections 30-5-130 and 30-7-10 of the 1976 South Carolina Code deal specifically with the recording of real estate mortgages. Therefore, the repeal of Sections 30-5-160 and 30-5-170 of the 1976 South Carolina Code will not create any gap in the real estate recording statutes.
  5. The reasons for the repeal of Section 30-5-170 are discussed in paragraph 4 above.
  6. Section 33-9-130 deals with the matter of lost or destroyed corporate certificates, a topic covered by Uniform Commercial Code Section 36-8-405.
  7. Section 56-19-640, which is part of the South Carolina Certificate of Title Statute, sets forth rules for determining the validity and effectiveness of a security interest on a motor vehicle brought into South Carolina from another state. Under Section 36-9-302(3), which is part of the South Carolina UCC, the Certificate of Title Statute applies only to the perfection of a security interest in a motor vehicle. In all other respects (validity, enforcements, etc.) the security interest is governed by Article 9. Section 36-9-103 of the UCC sets forth rules governing security interests covering motor vehicles that are moved from one state to another. In light of this and in order to avoid the conflict that exists between these two statutes, Section 56-19-640 has been repealed as superfluous. The conflict results because the time periods for the continued effectiveness of a perfected security interest on a motor vehicle brought into this State from another state are quite different in the two statutes. This difference is accentuated in the 1988 UCC Amendments. Revised Section 36-9-103 specifically states that the rules in Section 36-9-103 govern the perfection and effects of perfection of security interests
in multistate transactions. In actuality, the time periods specified in Section 56-19-640 are considerably longer than those in Section 36-9-103, with the result that the out-of-state secured party has more protection and less incentive to reperfect in South Carolina than under the Section 36-9-103 rules and there is consequently a greater possibility that South Carolina citizens acquiring interests in such motor vehicles by purchase or lien would be adversely affected by the possible continued effectiveness of the original lien. This provides an additional reason for repealing Section 56-19-640.
  8. Section 56-19-690 of the 1976 South Carolina Code specifies how information concerning a security interest on a motor vehicle can be obtained from a secured party. As was pointed out in the preceding paragraph 7, the Motor Vehicle Certificate of Title Statute only applies to the perfection of security interests in motor vehicles and Section 56-19-690 does not pertain to "perfection" of a security interest. In addition, Section 56-19-690 allows another lienholder as well as the "owner" to obtain "pertinent information". However, Section 36-9-208 which is the section in the UCC setting forth the requirements for obtaining information from a secured party, authorizes only the debtor to request the amount of unpaid indebtedness and a list of the collateral. The repeal of Section 56-19-690 avoids this confusion and overlap.
  (B) The Reporter's Notes which follow discuss the statutes in the 1962 Code which are repealed in Section 9(B) of this act.
  1. Sections 8-181 through 8-200 of the 1962 South Carolina Code comprise the American Banker's Association Bank Collection Code enacted in South Carolina in 1930. This statute has been superseded by Article 4 of the Uniform Commercial Code (Sections 36-4-101, et seq.)
dealing generally and more extensively with bank deposits and collections.
  2. Sections 8-211 through 8-215 of the 1962 South Carolina Code were added to the Bank Collection Code in 1949 and deal with the right of a depository bank to charge back against its customers items found to be uncollectible. This subject matter is covered by a number of sections
in Article 4 of the Uniform Commercial Code.
  3. Sections 8-801 through 8-1076 of the 1962 South Carolina Code comprise the Uniform Negotiable Instruments Law enacted in South Carolina in 1914. This statute has been replaced
by Article 3 of the Uniform Commercial Code (Sections 36-3-101, et seq.) as well as some provisions of Articles 4 (Sections 36-4-101, et seq.) and 8 (Sections 36-8-101, et seq.)
  4. Sections 8-1081 through 8-1108 of the 1962 South Carolina Code were added as South Carolina amendments to the Uniform Negotiable Instruments Law in 1951 and have been replaced by provisions of Articles 3 and 4 of the Uniform Commercial Code. See paragraph 3 above.
  5. Section 11-103 of the 1962 Code is that part of the South Carolina statute of frauds relating specifically to the sale of personal property. It has been replaced by the UCC statute of frauds section (Section 36-2-201) which deals exclusively and more extensively with the requirement of a writing as a condition to the enforcement or a contract for the sale of goods. In addition, the requirements of a writing are also set forth in other sections of the UCC. See Sections 36-1-206 (contracts for the sale of personal property other than goods and personalty not covered by any other provision in the Uniform Commercial Code), 36-8-318 (contracts for the sale of securities) and 36-9-203 (security agreements).
  6. Sections 11-201 through 11-206 of the 1962 South Carolina Code are the South Carolina Bulk Sales Act which has been replaced by Article 6
of the Uniform Commercial Code. See Sections 36-6-101, et seq.
  7. Sections 12-17.1 through 12-17.25 of the 1962 South Carolina Code are the Uniform Stock Transfer Act carried over from Sections 12-301 to 12-324 of the 1952 South Carolina Code and incorporated into the South Carolina Business Corporation Act of 1962. These sections have been superseded by Article 8 of the Uniform Commercial Code, which includes complete coverage of the law relating to the transfer of stock as well as other securities. See Sections 36-8-101, et seq.
  8. Section 27-56.1 of the 1962 South Carolina Code excepted Aiken County from Section 14-19-40 of the 1976 South Carolina Code. The repeal of Section 14-19-40 by Act 164 of 1979 necessitates the repeal of this statute.
  9. Sections 27-61.1, 17-62, and 27-63 of the 1962 South Carolina Code provide local county exceptions to Section 14-19-80 of the 1976 South Carolina Code and the repeal of Section 14-19-80 by Act 164 of 1979 mandates the repeal of these sections.
  10. See paragraph 9 above.
  11. See paragraph 9 above.
  12. Sections 27-64, 64.l, and 64.2 and Section 27-65 of the 1962 South Carolina Code specify fees that are to be charged in certain named counties for indexing and registering crop mortgages. Since security interests in crops are perfected by filing financing statements under the Uniform Commercial Code and the UCC specifies the fees for filing such financing statements (see Section 36-9-403) these sections have been superseded and therefore are repealed.
  13. See paragraph 12 above.
  14. See paragraph 12 above.
  15. See paragraph 12 above.
  16. Section 27-66.1 of the 1962 Code authorizes a special fee for crop lien searches. It is inconsistent with Section
36-9-407 of the 1976 South Carolina Code, which is part of the UCC.
  17. Section 45-151 of the 1962 South Carolina Code prescribes the necessary description of collateral to be set out in a chattel mortgage as a prerequisite to its validity. This section has been superseded by various provisions in the Uniform Commercial Code. The basic requirements for the validity of a security interest in personalty are set in Section 36-9-204(1) and the sufficiency of the description is set forth in Section 36-9-110.
  18. Section 45-152 of the 1962 South Carolina Code validated a mortgage in future crops to be grown within five years of its execution. UCC Section 36-9-204(3) and (4) as revised by Section 5 of this act recognizes the validity of the after-acquired property clause in future crops without any time limitation and has superseded Section 45-152.
  19. Section 45-158 of the 1962 South Carolina Code provides for redemption of mortgaged property by the mortgagor. This section has been replaced by UCC Section 36-9-506 which sets out the requirements for the debtor's right to redeem collateral subject to a security interest.
  20. Section 45-161 of the 1962 South Carolina Code deals with the situation where a chattel mortgagor discharges the debt by paying a subsequent holder of the note who is not the mortgagee of record. In such cases, the section provides that the cancelled mortgage must be presented before satisfaction will be entered. This situation is covered by UCC Section 36-9-404(1) which requires the assignment instrument from the secured party of record before the clerk will act on a termination statement issued by an assignee of the interest.
  21. Section 45-162 of the 1962 South Carolina Code prescribes the duty and the procedure for the satisfaction of chattel mortgages in Oconee County and the penalty for failing to comply
with this duty. This section has been replaced by UCC Section 36-9-404.
  22. Section 45-163 of the 1962 South Carolina Code is an ancient provision (dating back to 1712) which actually amounts to a two-year statute of limitations on the exercise of a chattel mortgagor's right to redeem collateral after the mortgagee has taken possession. This section has been superseded by UCC Section 36-9-504(3) under which the secured party in possession after default must act in a "commercially reasonable" manner in disposing of the collateral which would presumably require him to sell within two years. Section 45-163 of the 1962 South Carolina Code is also inconsistent with portions of Uniform Commercial Code Sections 36-9-505 and 36-9-506 which deal with the secured party's right to keep the collateral in satisfaction of the indebtedness and the debtor's right of redemption in such a case.
  23. Section 45-164 of the 1962 South Carolina Code prescribes the procedure for notice of a liquidation sale of collateral upon default in payment of the secured debt. This procedure has been superseded by the UCC default provisions of Part 5 of Article 9 and especially Section 36-9-504 which requires only "reasonable notification of the time and place of any sale."
  24. Sections 45-201 through 45-211 of the 1962 South Carolina Code constitute the South Carolina Assignment of Accounts Receivable Statute. It has been superseded by Article 9 of the UCC which governs the assignment and sale of accounts [see Section 36-9-102(1)] including such matters covered by the present statute as place of filing and rights on default.
  25. Sections 45-401 through 45-410 of the 1962 South Carolina Code constitute the South Carolina Factor's Lien Statute governing a factor's security interest in certain types of inventory. Article 9 of the Uniform Commercial
Code has superseded all existing statutes dealing with security interests in personalty and thus this statute is no longer effective.
  26. Section 60-64.1 of the 1962 Code deals with chattel mortgage books. The repeal of all other statutes relating to chattel mortgage books necessitates the official repeal of this statute as well. See Sections 9(A)(4) and (5) of this act and the relevant Reporter's Notes to Section 9(A).
  27. Section 60-301 of the 1962 South Carolina Code, which provides for the filing of the original or a copy of the instrument which conveys a lien interest in personal property, has been superseded by Part 4 of Article 9 of the UCC. See Sections 36-9-401, et seq. Thus, Section 60-301 of the 1962 South Carolina Code is repealed to avoid overlap and inconsistency with the UCC. The repeal of this and other related sections does present one problem: Section 60-301 of the 1962 South Carolina Code requires that any assignment, satisfaction, release, or contract in the nature of subordination, waiver or extension of a landlord's lien, laborer's lien, or sharecropper's lien be recorded in the chattel mortgage books. See also Sections 30-7-60 and 30-7-70 of the 1976 South Carolina Code. It would not seem that there are sufficient numbers of these miscellaneous liens to justify keeping the chattel mortgage books on a permanent basis. The most practical way to handle this problem is to enact a new statute that would provide for a separate set of books for recording and indexing these miscellaneous liens, similar to the separate Mechanics Lien and Federal Tax Lien books kept in the local recording offices. This is accomplished by subsection (15) of Section 8 of this act.
  28. Section 60-302 of the 1962 South Carolina Code states special rules with respect to the sufficiency of recording a chattel mortgage when
the amount is less than one hundred dollars. Since UCC Section 36-9-402 sets out the minimum requirements of the contents of a financing statement, the instrument filed in order to perfect a security interest in personal property, the present statute is officially repealed to avoid overlap and inconsistency.
  29. Section 60-302.1 of the 1962 South Carolina Code, excepting Aiken County from the provisions of Section 60-302 of the 1962 South Carolina Code, should be repealed with the repeal of the latter statute. (see paragraph 28, supra.)
  30. Section 60-303 of the 1962 South Carolina Code prescribes the method of recording a security in crops and the essential contents of the instrument recorded. The contents of a financing statement to be filed in order to perfect a security interest in crops are set out in UCC Section 36-9-402 and the place of filing in UCC Section 36-9-401. Thus Section 60-303 of the 1962 South Carolina Code overlaps in several respects and is inconsistent with the UCC perfection rules.
  31. Section 60-304 of the 1962 South Carolina Code excepts certain counties from the provisions of Section 60-303 of the 1962 South Carolina Code. The repeal of the latter section (see paragraph 30, supra.) would, of course, nullify the effect of the former.
  32. Section 60-305 of the 1962 South Carolina Code, prescribing the duration of the effective filing period for a security interest in personal property as three years, has been superseded by Uniform Commercial Code Section 36-9-403(2), which extends the basic effective filing period to five years.
  33. Section 60-306 of the 1962 South Carolina Code, prescribing the method of extending or renewing the effective filing period of a chattel mortgage, has been superseded by UCC Section 36-9-403(3) as far as transactions
entered into after December 31, 1967, are concerned. Section 36-9-403(3) accomplishes a similar result by the execution and filing of a "continuation statement". Note, however, that Section 60-306 can still be utilized to renew pre-code transactions. See Section 36-10-102 and the South Carolina Reporter's Notes to that section. See also Section 36-11-106(3) of the 1981 UCC Amendments.
  34. Section 60-306.1 of the 1962 South Carolina Code creates special provisions for extending the effective dates of a recorded mortgage in Charleston and Oconee Counties. This section has been superseded by UCC Section 36-9-403(3).
  35. Section 60-307 of the 1962 South Carolina Code excepts certain mortgages from the application of the preceding two sections. The repeal of the sections referred to requires repeal of this section as well.
  36. Section 60-308 of the 1962 South Carolina Code, which applies to Sumter County, requires instruments to be submitted to the clerk in duplicate, who is required to return the original with the notation of the date and place of recording. UCC Section 36-9-407 accomplishes the same purpose and Section 60-308 is officially repealed to avoid any overlap or inconsistency.
  37. Section 60-309 of the 1962 South Carolina Code, applicable only to Charleston County, permits the removal of chattel mortgage records upon re-recording of the mortgage or upon expiration of the effective record notice. These methods of handling chattel mortgage have been replaced by provisions of Part 4 of Article 9 of the Uniform Commercial Code providing for the filing of continuation statements and termination statements. See Sections 36-9-404(3) and 36-9-404.
  38. Section 60-310 of the 1962 South Carolina Code, applicable only to Richland County,
directs the clerk to keep only one set of indexes for chattel mortgages. The purpose of this section is to exempt Richland County from the provisions of Section 60-302 of the 1962 South Carolina Code calling for a separate record of chattel mortgages where the debt is no more than one hundred dollars. The repeal of Section 60-302 (see paragraph 28, supra.) renders this exception and hence this statute unnecessary.
  39. Section 60-311 of the 1962 South Carolina Code, which requires a certain standard of legibility for recording of chattel mortgages in Spartanburg County, is repealed along with the other statutes regulating the recording of chattel mortgages on the grounds that all such statutes have been superseded by Part 4 of Article 9 of the Uniform Commercial Code. See Sections 36-9-401, et seq.
  (C) Subsection (C) of Section 9 repeats the language contained in Section 36-10-103.
Official comments and reporter's notes
SECTION 10. The Official Comments and the South Carolina Reporter's Notes which are included after each section are included for analytical and information purposes only and must not be considered to be part of the sections themselves.
Effective date
SECTION 11. This act takes effect January 1, 1989.