Deck 13: Secured Transactions and Sales

Question 1

CPA QUESTION Under the UCC Secured Transactions Article, perfection of a security interest by a creditor provides added protection against other parties in the event the debtor does not pay its debts. Which of the following parties is not affected by perfection of a security interest?

A) Other prospective creditors of the debtor
B) The trustee in a bankruptcy case
C) A BIOC
D) A subsequent personal injury judgment creditor

Answer 1

The answer is A.
Article 9 refers to goods and fixtures - these may be tangible or intangible but of a set value of a specific interest. In addition, Article 9 involves parties that have an obligation to the debtor. In this case, prospective creditors have not entered a set agreement with the debtor and thus, are not obligated to him in any way.

Question 2

When Michelle buys a laptop, she pays an extra fee so that the computer arrives at her door with the latest version of Microsoft Word pre-installed. Under Article 9, the word processing program is considered:

A) "goods"
B) "services"
C) "software"
D) None of the above

Answer 2

Article 9 under UCC (Uniform commercial code) is explained below:
Article 9 of UCC controls secured transactions in the personal property. This can be applied to any transaction intended to create a security interest in personal property or fixtures. Here, fixtures are goods which are used for personal needs.
Article 9 of UCC is applicable for personal property used as collateral which may be goods, and other things. Here, Option
is correct.
Likewise,
Article 9 of UCC is applicable for personal property used as collateral which may be goods, and other things. But Option B provides the information that Article 9 includes services instead of goods. Therefore, Option B is incorrect.
Article 9 of UCC is applicable for personal property used as collateral which may be goods, and other things. But Option C provides the information that Article 9 includes software instead of goods. Therefore, Option C is incorrect.
Article 9 of UCC is applicable for personal property used as collateral which may be goods, and other things. But Option D provides the information that Article 9 does not includes software, goods, and services. Therefore, Option D is incorrect.

Question 3

The publication of the original UCC in 1952 sparked an expansion of the statute of frauds in the United States to cover sales of goods of $500 or more. At about the same time (in 1954), the British Parliament repealed its longstanding statute of frauds as applied to sales of goods. Some have argued that we should scrap UCC §2-201 on the grounds that it encourages misdealing as much as it prevents fraud. Consider the following two hypotheticals:
(In the United Stats) Johnny is looking at a used Chevy Tahoe. He knows that the $7,000 price is a good one, but he wants to go online and see if he can find an even better deal. In the 20 minutes he has been with the car's current owner, the owner has received three phone calls about the car. Johnny wants to make sure that no one else buys the car while he is thinking the deal over, so he makes a verbal agreement to buy the car and shakes the seller's hand. He knows that because of the statute of frauds and the fact that nothing is in writing, he does not yet have any enforceable obligation to buy the car. (In the United Kingdom) Nigel sells used Peugeots in Liverpool. When he senses interest from customers, he aggressively badgers them until they verbally commit to buy. If the customers later get cold feet and try to back out of the deal, he holds them to the verbal contracts. Because there is no longer a UCC-style statute of frauds in Britain, the buyers are stuck.
Rate the degree to which you believe Johnny and Nigel acted wrongfully. Did one behave more wrongfully than the other? If so, which one, and why?

Answer 3

Rating of J and N who acted wrongly is explained below:
N has acted incorrectly in this case as per "statute of fraud". In the "statute of fraud", it requires a written agreement between the parties on the sales of goods worth $500 or more. However, N has made only a verbal agreement to enforce a contract.
N has only behaved more wrongly than J. J has also committed the same mistake. But he knew that this contract does not have any enforceability in the court of law.

Question 4

Alpha perfects its security interest by properly filing a financing statement on January 1, 2010. Alpha files a continuation statement on September 1, 2014. It files another continuation statement on September 1, 2018. When will Alpha's financing statement expire?

A) January 1, 2015
B) September 1, 2019
C) September 1, 2023
D) Never

Question 5

Hasbro used to manufacture a toy called "Wonder World Aquarium." The toy included a powder that, when mixed with water, formed a gel that filled a plastic aquarium. Children could then place plastic fish in the aquarium and create underwater scenes. Cloud Corporation supplied the powder to Hasbro. The toy sold poorly, and Hasbro's need for the powder diminished.
The two companies discussed changing the powder's formula. Cloud believed the conversation amounted to an indication that Hasbro would continue to buy powder, so it produced large quantities. Although it did not receive an order from Hasbro, Cloud sent an order acknowledgment for 9.5 million packets to Hasbro. Hasbro made no objection to it.
Did the order acknowledgment create an enforceable agreement? What specific facts determine your answer?

Question 6

Which of the following transactions is not governed by Article 2 of the UCC?

A) Purchasing an automobile for $35,000
B) Leasing an automobile worth $35,000
C) Purchasing a stereo worth $501
D) Purchasing a stereo worth $499

Question 7

The publication of the original UCC in 1952 sparked an expansion of the statute of frauds in the United States to cover sales of goods of $500 or more. At about the same time (in 1954), the British Parliament repealed its longstanding statute of frauds as applied to sales of goods. Some have argued that we should scrap UCC §2-201 on the grounds that it encourages misdealing as much as it prevents fraud. Consider the following two hypotheticals:
(In the United Stats) Johnny is looking at a used Chevy Tahoe. He knows that the $7,000 price is a good one, but he wants to go online and see if he can find an even better deal. In the 20 minutes he has been with the car's current owner, the owner has received three phone calls about the car. Johnny wants to make sure that no one else buys the car while he is thinking the deal over, so he makes a verbal agreement to buy the car and shakes the seller's hand. He knows that because of the statute of frauds and the fact that nothing is in writing, he does not yet have any enforceable obligation to buy the car. (In the United Kingdom) Nigel sells used Peugeots in Liverpool. When he senses interest from customers, he aggressively badgers them until they verbally commit to buy. If the customers later get cold feet and try to back out of the deal, he holds them to the verbal contracts. Because there is no longer a UCC-style statute of frauds in Britain, the buyers are stuck.
Do you think that the UCC statute of frauds as it currently exists is more likely to prevent fraud, or is it more likely to encourage misunderstandings and deception? Why? Overall, is it sensible to require that purchases of big-ticket items be in writing before they are final?

Question 8

Nina owns a used car lot. She signs and sends a fax to Seth, a used car wholesaler who has a huge lot of cars in the same city. The fax says, "Confirming our agrmt-I pick any 15 cars fr yr lot-30% below blue book." Seth reads the fax, laughs, and throws it away. Two weeks later, Nina arrives and demands to purchase 15 of Seth's cars. Is he obligated to sell?

Question 9

Under the UCC statute of frauds, a contract must be signed by the_________ to count as being "in writing." Also, the __________of the goods must be written.

A) plaintiff; price
B) plaintiff; quantity
C) defendant; price
D) defendant; quantity

Question 10

ETHICS The Dannemans bought a Kodak copier worth over $40,000. Kodak arranged financing by GECC and assigned its rights to that company. Although the Dannemans thought they had purchased the copier on credit, the papers described the deal as a lease. The Dannemans had constant problems with the machine and stopped making payments. GECC repossessed the machine and, without notifying the Dannemans, sold it back to Kodak for $12,500, leaving a deficiency of $39,927. GECC sued the Dannemans for that amount. The Dannemans argued that the deal was not a lease, but a sale on credit. Why does it matter whether the parties had a sale or a lease? Is GECC entitled to its money? Finally, comment on the ethics. Why did the Dannemans not understand the papers they had signed? Who is responsible for that? Are you satisfied with the ethical conduct of the Dannemans? Kodak? GECC?

Question 11

Eugene Ables ran an excavation company. He borrowed $500,000 from the Highland Park State Bank. Ables signed a note promising to repay the money and an agreement giving Highland a security interest in all of his equipment, including after-acquired equipment. Several years later, Ables agreed with Patricia Myers to purchase a Bantam Backhoe from her for $16,000, which he would repay at the rate of $100 per month, while he used the machine. Ables later defaulted on his note to Highland, and the bank attempted to take the backhoe. Myers and Ables contended that the bank had no right to take the backhoe. Was the backhoe covered by Highland's security interest? Did Ables have sufficient rights in the backhoe for the bank's security interest to attach?

Question 12

Assume that a contract is modified. New consideration must be present for the modification to be binding if the deal is governed by which of the following?

A) The common law
B) The UCC
C) Both A and B
D) Neither A nor B

Question 13

After reading this chapter, will your behavior as a consumer change? Are there any types of transactions that you might be more inclined to avoid? After reading this chapter, will your future behavior as a businessperson change? What specific steps will you be most careful to take to protect your interests?

Question 14

The Copper King Inn, Inc., had money problems. It borrowed $62,500 from two of its officers, Noonan and Patterson, but that did not suffice to keep the inn going. So Noonan, on behalf of Copper King, arranged for the inn to borrow $100,000 from Northwest Capital, an investment company that worked closely with Noonan in other ventures. Copper King signed an agreement giving Patterson, Noonan, and Northwest a security interest in the inn's furniture and equipment. But the financing statement that the parties filed made no mention of Northwest. Copper King went bankrupt. Northwest attempted to seize assets, but other creditors objected. Is Northwest entitled to Copper King's furniture and equipment?

Question 15

CPA QUESTION Under the UCC Secured Transactions Article, which of the following actions will best perfect a security interest in a negotiable instrument against any other party?

A) Filing a security agreement
B) Taking possession of the instrument
C) Perfecting by attachment
D) Obtaining a duly executed financing statement

Question 16

A perfected security interest is far from perfect. We examined, for example, an exception to normal perfection rules involving BIOCs. Are exceptions reasonable? Should the UCC change to give the holder of a perfected interest absolute rights against absolutely everyone else?

Question 17

The state of Kentucky filed a tax lien against Panbowl Energy, claiming unpaid taxes. Six months later, Panbowl bought a powerful drill from Whayne Supply, making a down payment of $11,500 and signing a security agreement for the remaining debt of $220,000. Whayne perfected the next day. Panbowl defaulted. Whayne sold the drill for $58,000, leaving a deficiency of just over $100,000. The state filed suit, seeking the $58,000 proceeds. The trial court gave summary judgment to the state, and Whayne appealed. Who gets the $58,000?