Deck 34: Secured Transactions in Personal Property

Question 1

On March 1, Green went to Easy Car Sales to buy a car. Green spoke to a salesperson and agreed to buy a car that Easy had in its showroom. On March 5, Green made a $500 down payment and signed a security agreement to secure the payment of the balance of the purchase price. On March 10, Green picked up the car. On March 15, Easy filed the security agreement. On what date did Easy's security interest attach?

A) March 1
B) March 5
C) March 10
D) March 15

Answer 1

Definition
UCC 9-203 - states how security interest is created.
1. A security agreement, e.g. a loan with collateral, is formed
2. Value is given
3. Debtor has rights in collateral
Answer
In this case, the first provision for security interest the security agreement was formed on March 5. The second and third provision is satisfied as the debtor has right to the car on March 10. Hence, all the provision to security interest was satisfied by March 10. The answer is c.

Question 2

Charles Lakin, who did business as Sun Country Citrus, owned a citrus-packing plant in Yuma, Arizona. In 1985, the packing plant was leased to Sunco Partners. Under the terms of the lease, Sunco had the right to replace existing packing, sizing, and grading equipment with "state-of-the art" equipment.
In 1986, PKD, Inc. purchased Sunco. Sunco signed a bill of sale for all of its "personal property, including, but not limited to, packing equipment, boilers, compressors, and packinghouse- related supplies." The bill of sale was secured by an Article 9 security interest executed by PKD as the debtor and Lakin/Sunco as the creditors.
In February 1987, PKD changed its name to Amcico and negotiated for the purchase and lease of citrus-sorting equipment from Pennwalt Corp., now Elf Atochem. The documents for the transaction specifically provided that title to the equipment would remain with Elf Atochem until all payments were made under the terms of the sale and lease agreement.
In December 1987, Amcico defaulted on its payments to Lakin and Sunco. Lakin and Sunco took possession of all of the equipment in the Yuma plant. Elf Atochem objected, claiming its title to the citrus-sorting equipment. Lakin and Sunco produced the security agreement giving them such equipment as collateral. Elf Atochem claimed that because it retained title in the citrussorting equipment, there was no interest in it on the part of Amcico, and the security interest of Sunco and Lakin never attached. Was Elf Atochem correct? [Elf Atochem North America, Inc. v Celco, Inc., 927 P2d 355 (Ariz App)]

Answer 2

Refer to the case Elf Atochem North America, Inc v Celco, Inc
Case Issue
The issue is which company has the claim to the collateral in a security agreement, company E which has the leased the collateral or company C , creditors to security agreement. Note that both companies have security interest.
Trial court held for company E. Company C appealed.
Relevant Terms, Laws, and Cases
Security agreement - is a contract that has a security interest, collateral. For example, a creditor may loan money to the debtor with a property that belongs to the debtor as collateral. The creditor may repossess the collateral if the debtor defaults.
ARS 47-9312(C) - Arizona UCC that holds that a creditor with purchase money security interest in a non-inventory good (e.g. goods used for production, not for resale) with a filed financial statement within 20 days of delivery to debtor has priority over conflicting security interests.
Purchase Money Security Interest (PMSI) - security interest based on conditional sale. If the sale was financed by a creditor (can be seller itself, or a third party such as bank), then the creditor would have the PMSI on the sold items as collateral.
Opinion
Appeals court held for company E.
In this case, company E has Purchase Money Security Interest (PMSI) in the collateral which was sold to the debtor. This is because E produced the collateral and sold it on credit, and filed a financial statement for it. The court applied Arizona's UCC 47-9312(C) which gives companies with PMSI priority interest over other creditors.

Question 3

Carr Corp. sells VCRs and videotapes to the public. Carr sold and delivered a VCR to Sutter on credit. Sutter executed and delivered to Carr a promissory note for the purchase price and a security agreement covering the VCR. Sutter purchased the VCR for personal use. Carr did not file a financing statement. Is Carr's security interest perfected?

A) No, because the VCR was a consumer good.
B) No, because Carr failed to file a financing statement
C) Yes, because Carr retained ownership of the VCR
D) Yes, because it was perfected at the time of attachment

Answer 3

A good sold on credit for consumer use with a security agreement automatically provides the seller with perfection. Hence, it seller doesn't need to file financing statement for perfection. The answer is d.

Question 4

In 1983, Carpet Contracts owned a commercial lot and building, which it operated as a retail carpet outlet. In April of 1983, Carpet Contracts entered into a credit sales agreement with Young Electric Sign Corp. (Yesco) for the purchase of a large electronic sign for the store. The cost of the sign was $113,000, with a down payment of $25,000 and 60 monthly payments of $2,100 each.
In August 1985, Carpet Contracts agreed to sell the property to Interstate. As part of the sale, Carpet Contracts gave Interstate an itemized list showing that $64,522 of the proceeds from the sale would be used to pay for the "Electronic Sign." The property was transferred to Interstate, and the Carpet Contracts store continued to operate there, but now it paid rent to Interstate. In June 1986, Carpet Contracts asked Yesco to renegotiate the terms of the sign contract. Yesco reduced Carpet Contracts' monthly payments and filed a financing statement on the sign at the Utah Division of Corporations and Commercial Code.
In December 1986, Interstate agreed to sell the property and the sign to the Webbs, who conducted a title search on the property, which revealed no interest with respect to the electronic sign. Interstate conveyed the property to the Webbs. Carpet Contracts continued its operation but was struggling financially and had not made its payments to Yesco for some time. By 1989, Yesco declared the sign contract in default and contacted the Webbs, demanding the balance due of $26,100. The Webbs then filed suit, claiming Yesco had no priority as a creditor because its financing statement was not filed in the real property records where the Webbs had done their title search before purchasing the land. Was the financing statement filed properly for perfection? [Webb v Interstate Land Corp., 920 P2d 1187 (Utah)]

Question 5

On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace's entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace's premises, all future-acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business. Which of the following statements is correct?

A) The refrigerators sold to Zone will be subject to Rome's security interest.
B) The refrigerators sold to Zone will not be subject to Rome's security interest.
C) The security interest does not include the proceeds from the sale of the refrigerators to Zone.
D) The security interest may not cover afteracquired property even if the parties agree.

Question 6

McLeod purchased several items from Sears, Roebuck Co. on credit. The description of the items, in which Sears took a purchase money security interest, was as follows: "MITER SAW; LXITVRACDC [a television, videocassette recorder, and compact disc spinner]; 25" UPRIGHT, 28" UPRIGHT [two pieces of luggage]; BRACELET, DIA STUDS, RING; 14K EARR, P, EARRINGS, P [diamond bracelet, ring, and earrings]; and 9-INCH E-Z-LIFT [an outdoor umbrella]." In a dispute over creditors' priorities in McLeod's bankruptcy, one creditor argued that the description of the goods was insufficient to give Sears a security interest. Does the description meet Article 9 standards? [McLeod v Sears, Roebuck Co., 41 UCC2d 302 (Bankr ED Mich)]

Question 7

Fogel purchased a television set for $900 from Hamilton Appliance. Hamilton took a promissory note signed by Fogel and a security interest for the $800 balance due on the set. It was Hamilton's policy not to file a financing statement until the purchaser defaulted. Fogel obtained a loan of $500 from Reliable Finance, which took and recorded a security interest in the set. A month later, Fogel defaulted on several loans and one of his creditors, Harp, obtained a judgment against Fogel, which was properly recorded. After making several payments, Fogel defaulted on a payment due to Hamilton, who then recorded a financing statement subsequent to Reliable's filing and the entry of the Harp judgment. Subsequently, at a garage sale, Fogel sold the set for $300 to Mobray. Which of the parties has the priority claim to the set?

A) Reliable
B) Hamilton
C) Harp
D) Mobray

Question 8

When Johnson Hardware Shop borrowed $20,000 from First Bank, it used its inventory as collateral for the loan. First Bank perfected its security interest by filing a financing statement. The inventory was subsequently damaged by fire, Flanders Insurance paid Johnson Hardware $5,000 for the loss, but First Bank claimed the proceeds of the insurance. Was First Bank correct? Why or why not?

Question 9

Consider the following cases and determine whether the financing statements as filed would be valid under Article 9. Be sure to consider the standard of "seriously misleading" under Revised Article 9.
a. In re Thriftway Auto Supply, Inc., 159 BR 948, 22 UCC Rep Serv 2d 605 (WD Okla). The creditor used the debtor's corporate trade name, "Thriftway Auto Stores," not its legal name, "Thriftway Auto Supply, Inc."
b. In re Mines Tire Co., Inc., 194 BR 23, 29 UCC2d 617 (Bankr WDNY). The creditor used the name "Mines Company Inc." instead of "Mines Tire Company, Inc."
c. Mountain Farm Credit Service, ACA v Purina Mills, Inc., 119 NC App 508, 459 SE2d 75, 27 UCC2d 1441. The creditor filed the financing statement under "Warren Killian and Robert Hetherington dba Grey Daw Farms" in a situation in which the two individuals were partners running Grey Daw Farms as a partnership.
d. B.T. Lazarus Co. v Christofides, 104 Ohio App 3d 335, 662 NE2d 41, 29 UCC2d 627. The creditor filed a financing statement in the debtor's old name when, prior to filing, the debtor had changed its name from B.T.L., Inc., to Alma Manufacturing, Inc.
e. In re SpecialCare, Inc., 209 BR 13, 34 UCC2d 857 (Bankr ND Ga). The creditor failed to refile an amended financing statement to reflect debtor's name change from "Davidson Therapeutic Services, Inc." to "SpecialCare, Inc."
f. Industrial Machinery Equipment Co. Inc. v Lapeer County Bank Trust Co., 213 Mich App 676, 540 NW2d 781, 28 UCC2d 1033. The creditor filed the financing statement under the company's trade name, KMI, Inc., instead of its legal name, Koehler Machine, Inc.
g. First Nat'l Bank of Lacon v Strong, 278 Ill App 3d 762, 215 Ill Dec 421, 663 NE2d 432, 29 UCC2d 622. Creditor filed the financing statement using the trade name "Strong Oil Co." instead of the legal name "E. Strong Oil Company."

Question 10

First Union Bank of Florida loaned money to Dale and Lynn Rix for their purchase of Ann's Hallmark, a Florida corporation. First Union took a security interest in the store's equipment, fixtures, and inventory and filed the financing statement under the names of Dale and Lynn Rix. Subsequently, the Rixes incorporated their newly acquired business as Michelle's Hallmark Cards Gifts, Inc. When Michelle's went into bankruptcy, First Union claimed it had priority as a secured creditor because it had filed its financing statement first. Other creditors said First Union had priority against the Rixes but not against the corporation. Who was correct? What was the correct name for filing the financing statement? [In re Michelle's Hallmark Cards Gifts, Inc., 36 UCC2d 225 (Bankr MD Fla)]

Question 11

Rawlings purchased a typewriter from Kroll Typewriter Co. for $600. At the time of the purchase, he made an initial payment of $75 and agreed to pay the balance in monthly installments. A security agreement that complied with the UCC was prepared, but no financing statement was ever filed for the transaction. Rawlings, at a time when he still owed a balance on the typewriter and without the consent of Kroll, sold the typewriter to a neighbor. The neighbor, who had no knowledge of the security interest, used the typewriter in her home. Could Kroll repossess the typewriter from the neighbor?

Question 12

Kim purchased on credit a $1,000 freezer from Silas Household Appliance Store. After she had paid approximately $700, Kim missed the next monthly installment payment. Silas repossessed the freezer and billed Kim for the balance of the purchase price, $300. Kim claimed that the freezer, now in the possession of Silas, was worth much more than the balance due and requested that Silas sell the freezer to wipe out the balance of the debt and to leave something for her. Silas claimed that because Kim had broken her contract to pay the purchase price, she had no right to say what should be done with the freezer. Was Silas correct? Explain.

Question 13

Benson purchased a new Ford Thunderbird automobile. She traded in her old car and used the Magnavox Employees Credit Union to finance the balance. The credit union took a security interest in the Ford. Subsequently, the Ford was involved in a number of accidents and was taken to a dealer for repairs. Benson was unable to pay for the work done. The dealer claimed a lien on the car for services and materials furnished. The Magnavox Employees Credit Union claimed priority. Which claim had priority? [Magnavox Employees Credit Union v Benson, 331 NE2d 46 (Ind App)]

Question 14

Lockovich borrowed money from a bank to purchase a motorboat. The bank took a security interest in it but never filed a financing statement. A subsequent default on the loan occurred, and the debtor was declared bankrupt. The bank claimed priority in the boat, alleging that no financing statement had to be filed. Do you agree? Why? [In re Lockovich, 124 BR 660 (Bankr WD Pa)]

Question 15

In 1987, the Muirs bought a motor home. In 1988, the Muirs created and Bank of the West acquired and perfected a security interest in the motor home. In 1992, the Muirs entered into an agreement with Gateleys Fairway Motors by which Gateleys would sell the motor home by consignment. Gateleys sold the motor home to Howard and Ann Schultz. The Schultzes did not know of the consignment arrangement or of the security interest of the bank. Gateleys failed to give the sales money to the Muirs and then filed for bankruptcy. The Schultzes brought suit seeking a declaration that they owned the motor home free of the bank's security interest. The trial court granted the Schultzes summary judgment. Who has title to the motor home and why? [Schultz v Bank of the West, C.B.C., 934 P2d 421 (Ore)]

Question 16

On April 18, 2000, Philip Purkett parked his car, on which he owed $213 in payments, in his garage and locked the garage. Later that night, TWAS, Inc., a vehicle repossession company, broke into the garage and repossessed the car without notice to Purkett. To get the car back, Purkett paid a $140 storage fee and signed a document stating that he would not hold TWAS liable for any damages. Did TWAS and Key Bank violate Article 9 requirements on repossession? [Purkett v Key Bank USA, Inc., 2001 WL 503050, 45 UCC Rep Serv 2d 1201 (ND Ill)]

Question 17

A borrowed money from B and orally agreed that B had a security interest in equipment that was standing in A's yard. Nothing was in writing, and no filing of any kind was made. Nine days later, B took possession of the equipment. What kind of interest did B have in the equipment after taking possession of it? [Transport Equipment Co. v Guaranty State Bank, 518 F2d 373 (10th Cir)]

Question 18

Cook sold Martin a new tractor truck for approximately $13,000, with a down payment of approximately $3,000 and the balance to be paid in 30 monthly installments. The sales agreement provided that "on default in any payment, Cook [could] take immediate possession of the property... without notice or demand. For this purpose vendor may enter upon any premises on which the property may be." Martin failed to pay the installments when due, and Cook notified him that the truck would be repossessed. Martin left the tractor truck attached to a loaded trailer and locked on the premises of a company in Memphis. Martin intended to drive to the West Coast with the trailer. When Cook located the tractor truck, no one was around. To disconnect the trailer from the truck (because he had no right to the trailer), Cook removed the wire screen over a ventilator hole by unscrewing it from the outside with his penknife. He next reached through the ventilator hole with a stick and unlocked the door of the tractor truck. He then disconnected the trailer and had the truck towed away. Martin sued Cook for unlawfully repossessing the truck by committing a breach of the peace. Decide. [Martin v Cook, 114 So2d 669 (Miss)]

Question 19

Muska borrowed money from the Bank of California and secured the loan by giving the bank a security interest in equipment and machinery at his place of business. To perfect the interest, the bank filed a financing statement that did not contain Muska's address. Muska later filed for bankruptcy. The trustee in bankruptcy claimed that the security interest of the bank was not perfected because the omission of the residence address from the financing statement made it defective. Was the financing statement valid? [Lines v Bank of California, 467 F2d 1274 (9th Cir)]

Question 20

Kimbrell's Furniture Co. sold a new television set and tape player to Charlie O'Neil and his wife. Each purchase was on credit, and in each instance, a security agreement was executed. Later on the same day of purchase, O'Neil carried the items to Bonded Loan, a pawnbroker, and pledged the television and tape deck as security for a loan. Bonded Loan held possession of the television set and tape player as security for its loan and contended that its lien had priority over the unrecorded security interest of Kimbrell. Who had priority? [Kimbrell's Furniture Co. v Sig Friedman, d/b/a Bonded Loan, 198 SE2d 803 (SC)]