[The following examination question was part of an examination given for a course on both Articles 2 and 9 of the Uniform Commercial Code. The examination was an open book examination. During the examination students could consult any written materials except materials checked out of the law library. Students were asked to assume that the 1995 official text of the Uniform Commercial Code was in force in all relevant jurisdictions unless you are otherwise expressly directed. Where the text sets out alternate provisions (e.g.,  9-401(1)), they were to assume that the second alternative was in force.]

Graphic Designs Corporation ("Graphic") operates a printing business. It prints quality hardback books and glossy magazines.

Since it began operations in 1988 Graphic has borrowed working capital loans from First National Bank ("Bank"). To secure repayment of these loans, Graphic has executed promissory notes and a written security agreement granting Bank a security interest in all Graphic's then existing and after-acquired assets, including "printing equipment." The Bank filed a financing statement signed by Graphic with the Secretary of State in 1988 and renewed the financing statement in 1993. The financing statement gives the names and addresses of the parties and describes the collateral as including "printing equipment." The security agreement provides that there is default "if the Bank believes in good faith that the prospect of payment of the indebtedness or the performance of this agreement is impaired."

When it began operations in 1988, Graphic leased a "Milhouse" printing press from Printer Leasing Inc. ("PLI") for an eight-year term. The lease gave Graphic an option to purchase the press at any time before the end of the lease term for a stated sum, subject to a credit of 75 percent of the rental payments already made. To induce Graphic to exercise this option PLI later agreed to extend credit to Graphic for the unpaid purchase price.

Graphic exercised the option to purchase the press on December 31, 1995. The same day Graphic and PLI executed and exchanged the following documents:

PLI executed a bill of sale transferring title to the "Milhouse" press to Graphic.

Graphic executed a promissory note, a standard-form security agreement in favor of PLI to secure payment of the remaining purchase price, and a financing statement.

The promissory note is made payable for the outstanding purchase price of $360,000, payable in 36 monthly installments. The note makes no specific reference to the printing press.

The security agreement grants PLI "a continuing security interest in all of [Graphic's] accounts receivable, contract rights, chattel paper, security agreements, documents, machinery, equipment, fixtures, general intangibles, goods, instruments, inventory, trademarks, patents, license rights and good will whether now owned or hereafter acquired."

The financing statement gives the names and addresses of the parties and identifies the collateral as "'Milhouse' printing press."

PLI filed the financing statement with the Secretary of State on January 5, 1996.

In the summer of 1997 Graphic began negotiations with American Business Machines ("ABM"), the manufacturer of "Milhouse" presses to purchase another press. In October 1997, Graphic and ABM agreed on the purchase of a new press. Graphic and ABM agreed that the old "Milhouse" press would be traded-in and its value credited against the purchase price of the new press. Graphic telephoned the PLI chief executive officer to tell her about the exchange and she agrees that it sounds like a good deal but she does not specifically consent to the exchange. Graphic did not inform the Bank.

ABM delivered the new press to Graphic's plant on November 25. At this time ABM made arrangements to pick up the old press two weeks later.

Before ABM picked up the old press, an officer of the Bank heard of the exchange. The officer, who had been concerned with Graphic's financial soundness, concluded that the acquisition of a new press was not financially justified. The officer therefore directed Bank employees to repossess Graphic's assets. The employees went to the plant and demanded the keys to the outside locks. Graphic handed over the keys and closed down operations. Both the old and the new press are in the locked premises.

Within hours of the handing over of the keys, PLI learned of the Bank's actions. PLI promptly consults you about the status of its security interest in the presses and the relative priority of this interest. Advise PLI.

[This problem is inspired in part by Color Leasing 3, L.P. v. Federal Deposit Insurance Corporation, 975 F. Supp. 177 (D. R.I. 1997).]

1. This problem raises two principal questions: (1) "Given the broad description of the collateral in the security agreement, did PLI have an enforceable security interest in the first press?" and (2) "When did Graphic take possession of the press for purposes of the priority rule in section 9- 312(4)?" A third preliminary question is whether the 1988 lease is a "true" lease or a disguised secured transaction?

2. There is insufficient information about the terms of the lease agreement to know if the lease was a disguised security interest. That an additional inducement had to be offered to persuade Graphic to exercise the option suggests that the transaction was a true lease. The option formula alone apparently does not ensure that the lessee would exercise the option and the price provided by the formula is not nominal. Moreover, Graphic apparently could terminate the lease at any time and thus the Code does not deem the lease to be a disguised secured transaction. U.C.C.  1-201(37). The mere existence of the option to purchase does not make it a secured transaction. U.C.C.  1-201(37)(c).

3. If the lease is a "true" lease, PLI retains ownership of the press, Graphic has leasehold rights in the older press, and Bank would have a security interest only in those leasehold rights. As lessor (and thus full owner), PLI would have priority over the Bank following default by Graphic, the lessee.

4. If the lease is a disguised secured transaction, then Graphic is the owner of the press subject to PLI's unperfected security interest. PLI's interest is unperfected because PLI failed to file a financing statement and there are no relevant exceptions to filing on these facts. U.C.C.  9- 303(1), 9-302, 9-402. Bank's perfected security interest (see paragraph 5 below) would therefore have priority at all relevant times. U.C.C.  9-301(1)(a); 9-312(5).

5. Bank has an attached security interest in the first press. (If the 1988 lease is a "true" lease, Bank has an interest in the leasehold; if the lease is a disguised secured transaction, Bank has an interest in the ownership rights in the press.) Graphic signed ["executed"] a written security agreement with a sufficiently specific description; Bank gave value in the form of the loan; and Graphic had rights in the collateral whether a leasehold or ownership interest. U.C.C.  9-203(1). The signed financing statement was properly completed and filed in the proper office. U.C.C.  9-401(1), 9-402(1). The Bank's interest was perfected from the time that Graphic first acquired rights in the press in 1988. U.C.C.  9-303(1).

6. Assuming that the 1988 lease is a true lease, Graphic granted PLI a "continuing" security interest in "all of [Graphic's] ... machinery, equipment, fixtures, ..., goods, ... whether now owned or hereafter acquired"at the time it exercised the option. If this description is sufficient to identify the printer as collateral, PLI has an attached security interest on December 31, 1995: there is a signed ["executed"] security agreement; PLI gave value; and Graphics has an ownership interest in the collateral evidenced by the bill of sale. The interest was perfected on January 5, 1996 by the filing of the financing statement with the Secretary of State. U.C.C.  9-303(1), 9-302(1), 9- 401(1)(c), and 9-402(1). The security interest is a purchase money security interest because taken by the seller to secure all or part of its price. U.C.C.  9-107(a).

7. To be a sufficient description of the collateral, the description "must reasonably identify what it describes." U.C.C.  9-110. The printing press is both "machinery" and "equipment". These terms are not "super-generic" and allow a third party to identify the relevant equipment. The court in Color Leasing so held in the following language:

"The FDIC argues that a security agreement which does not specifically reference the printing press cannot effect a valid attachment. Under the Code, a security interest is not enforceable unless the security agreement contains a description of the collateral. Mass. Gen. Laws ch. 106,  9-203(1)(a). However, "any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described." Id. at  9-110. "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." Id. at cmt. to 1972 rev.; see In re Clinton Hosp. Ass'n, 142 B.R. 601, 604-5 (Bankr. D. Mass.1992).

"The security agreement entered into between Color Leasing and Con-Graph covers "machinery" and "equipment". Such description, while generic, suffices to create a security interest in the printing equipment at issue. Accord In re Legal Data Sys., Inc., 135 B.R. 199, 200-01 (Bankr. D. Mass.1991) (holding that descriptive phrase "all of the Debtor's properties" in security agreement sufficed to create security interest in equipment); Nat'l Cash Register Co. v. Firestone & Co., Inc., 346 Mass. 255, 259, 191 N.E.2d 471 (Mass.1963) (holding security agreement's recital of "All contents of luncheonette including equipment" broad enough to include cash register); Fed. Deposit Ins. Corp. v. Hill, 13 Mass. App. Ct. 514, 517, 434 N.E.2d 1029 (Mass. App. Ct.), appeal denied, 386 Mass. 1104, 440 N.E.2d 1177 (1982)."

8. On the other hand, one could argue that the description is too broad because from the description a third party would not be able to identify which machinery or equipment is subject to the security interest. Graphic no doubt has other machinery and equipment than the press, and this other equipment is not subject to this security interest. While Graphic and PLI could testify about which equipment was intended they might not be disinterested at the time of Graphic's financial failure. If the description is too broad, then the security interest does not attach and Bank prevails as the only party with a security interest in the press.

9. Assuming that the description is adequate and that the 1988 lease is a true lease, the final major question is "When did Graphic take possession of the press for purposes of the priority rule in section 9-312(4)?" The exercise of the option and the granting of a security interest in 1995 creates a purchase money security interest because PLI is a seller retaining a security interest to secure the price of the press. U.C.C.  9-107(a). As a purchase money secured party, PLI would have priority over Bank's competing security interest if PLI perfected its interest within ten days after Graphic "receives possession of the collateral." U.C.C.  9-312(4). Graphic, of course, has had possession of the press since 1988 and filing a financing statement in January 1996 is more than ten days afterwards. But on our assumption that the 1988 lease was a true lease, the press was not "collateral" until December 31, 1995. Graphic received (or took) possession of the collateral therefore in December 31 and January 5 is within ten days. This result is consistent with the desire to encourage the purchase of new equipment. If this reasoning is followed then PLI has priority. U.C.C.  9-312(4). If, on the other hand, it is rejected then Bank has priority as the first to file. U.C.C.  9-312(5)(a).

10. The exchange of printing presses may change this result if it is determined that the PLI officer's actions amounted to authorization of the exchange. U.C.C.  9-306(2). Merely stating that the exchange sounded like a good deal does not, however, suggest that the speaker intended that there would be a waiver of PLI's rights. Her statement is equivocal: it is not inconsistent with her understanding that PLI's interest would continue notwithstanding the disposition. Moreover, ABM which is at least as interested in whether the interest continued could have insisted on a formal release but failed to do so.

11. Bank has an attached security interest in the new press when Graphic acquired rights in the press: the security agreement included after-acquired printers; giving the original value is all that is needed; and Graphic has rights in the new press. U.C.C.  9-203(1). Alternatively, Bank has an attached interest in the new press as identifiable proceeds of the disposition of the first press. U.C.C.  9-306(2). On either ground, the security interest is perfected at the time of attachment. As after-acquired collateral, the earlier-filed financing statement remains effective. As proceeds, the security interest is perfected because section 9-306(3)(a) is satisfied: the security interest was originally perfected by a filing in the same office that one would file a financing statement for the new press. U.C.C.  9-306(3)(a).

12. PLI would likewise have a security interest in the new press either as after-acquired property or as identifiable proceeds.

13. The date of filing or perfection as to the original press are the relevant dates for the new press as proceeds. U.C.C.  9-312(6). Thus, the party that prevails as to the original press will also prevail as to the new press. As argued above, PLI is likely to prevail.

14. There is no suggestion that ABM retained a security interest in the new press when it was sold. To the extent that ABM is an unsecured creditor, both PLI and Bank will have priority. Nor is ABM's position any stronger as a reclaiming seller under Article 2. Even if entitled to reclaim under section 2-702(2), the seller is subject to the rights of good faith purchasers and both creditors are purchasers with no suggestion of dishonest behavior. U.C.C.  2-702(3), 1- 201(19), (32), & (33).