Deck 39: Security Devices

Question 1

How is a security interest perfected in: a. inventory and equipment, b. fixtures, and c. consumer goods?

Answer 1

Perfected security interest refers to the right of the seller to collateral which is superior to the right of the third party.
The security interest is perfected in the following ways:
1) Equipment or inventory : A financing statement is required to be filed in appropriate office.
2) Fixtures : financing statement is required to be filed in the office where real estate mortgaging is involved.
3) Consumer goods : It is perfected without filling by just attaching it to the item.

Question 2

In order to secure $1.5 million in loans from Fifth Third Bank (Fifth), Odle, McGuire Shook (OMS) signed a security agreement giving Fifth a security interest in all its assets, including any deposit accounts it had with Fifth. Fifth perfected its security interest by filing a financing statement with the secretary of state. OMS defaulted on its loans but continued to conduct business, and Fifth honored checks that OMS drew on its account with Fifth. OMS also defaulted on a lease with People's National Bank (PNB), so PNB sued and obtained a judgment for over $60,000. To collect its judgment, PNB tried to attach any funds of OMS in accounts at Fifth. Fifth alleged that since it had perfected its security interest in OMS's accounts before PNB got a judgment against OMS, Fifth's security interest had priority over PNB's judgment lien. Did it?

Answer 2

Security Interest:
Under UCC 9-203 , the three requirements of a security interest are:
1. The creditor's possession of the collateral or a written security agreement,
2. the creditor's giving something of value to the debtor, and
3. the debtor's rights in the collateral.
Perfected Interest:
In order for a bank to have perfected its interest under UCC 9-301, 9-310(a), and 9-313(a) , it should have filed a financing statement with the appropriate government office if the collateral is business equipment.
Perfection is necessary for the bank to protect its interest from the claims of third parties. Once a security interest attaches, a transfer of possession of the collateral to the secured party can perfect the party's security interest without a filing UCC 9-310(b)(6); 9-313.
Legal Reasoning:
In Fifth Third Bank (Fifth) v. People's National Bank (PNB) , No. 49A02-0908-CV-753 (2010), the trial court found in favor of PNB with respect to the debtor priority.
The appellate court reversed and remanded with instructions because Fifth's security interest was automatically perfected by its control over the account and according to Indiana Law.
Therefore, Fifth's security interest HAD PRIORITY OVER PNB'S judgment.

Question 3

When a seller repossesses collateral after a default, what may the seller do with it?

Answer 3

The seller after repossessing the collateral can retain the object as a debt satisfying object, unless the debtor objects after being informed.
The personal property repossessed by the seller has to be given back to the debtor.

Question 4

What is the difference between a guaranty and suretyship in those states that retain a distinction between them?

Question 5

As president of Leroy Arts and Products Inc., Wioletta Plociennik signed a two-year building lease with O'Brien Brothers' Partnership, LLP. It contained no provision for extension or renewal and stated, "This lease contains the entire agreement between the parties". It stated the commencement date and that it ended two years later. Plociennik also signed a separate document that was a personal guaranty to pay O'Brien "the monthly terms as agreed to in an executed lease dated [the lease's date] between [Leroy] (Lessee) and O'Brien Brothers Partnership (Lessor), the terms and conditions as set forth in said lease." Two years later, they executed a two-year lease agreement that increased the space rented and set new rent and common area maintenance payments. Two years after that, they signed a third two-year lease of the same space but with increased rent. After Leroy began missing rent payments, Plociennik said she was no longer obligated on the guaranty, so O'Brien sued her. Did the guaranty cover the third lease?

Question 6

What requirements are there with respect to form for contracts of guaranty and contracts of suretyship?

Question 7

To buy a car, Rubena Session signed a forty-eight-month retail installment sales contract to National Auto Sales Inc., with Shameka Grandberry as cosigner. National assigned the contract to Jefferson Loan Co. Inc. Sessions defaulted after two payments. Jefferson repossessed the car. Although it sold the credit life and credit disability insurance required by the forty-eight-month contract, Jefferson failed to save the unearned premiums by cancelling the policies even though the contract provided an assignment of "unearned premiums" to its holder. Jefferson sent a notice to Session and Grandberry at Session's address, stating that it had repossessed the car. It said, "[]o redeem your vehicle, you will have to pay the entire amount owed … You may purchase your vehicle back … before it is sold. Information on the sale date will be supplied to you upon request." Jefferson returned the car to National, which was to make the remaining payments. When the last payment was made, Jefferson would assign the title to National, which could then resell the car. National made only five payments. Although Jefferson knew that National had stopped making payments, it never attempted to retrieve the car. National fraudulently obtained a duplicate motor vehicle title, sold the car, and kept the money. Jefferson learned that the car had been unlawfully sold by National five years later, when it received copies of the car's title documents from Grandberry during litigation. Jefferson eventually sued Session unsuccessfully, so four years after Grandberry cosigned the contract it sued her. The complaint did not state that Jefferson had repossessed the car. Grandberry alleged Jefferson had not disposed of the car in a commercially reasonable manner. Had it?

Question 8

What remedy does a guarantor damaged by the failure to receive notice of default of the principal have?

Question 9

In December, Lil' River Grill Inc. (LRG) entered into a five-year lease with Lawrenceville Properties. One part of the lease said its term lasted from the previous April. Another part, initialed by both parties, said it began the following May to June, and Lil' River had an option to terminate if not put in possession by then. It required the parties, after Lil' River gained possession, to execute a recordable document reciting the exact commencement date. Timothy Brown signed an unconditional guarantee of Lil' River's obligations under the lease. Four months after taking possession. Lil' River assigned the lease to LRG Group, and Brown signed as the "Personal Guarantor" of the assignor's obligations. The assignment stated that Lawrenceville and LRG could change or modify the lease in any way. The parties signed an amendment to the lease with new requirements by the lessee. Brown signed the amendment, which stated he would continue to guarantee the lease personally. Almost three years later, LRG defaulted on the lease. Lawrenceville sued Brown. He argued that the changes to the lease invalidated his guaranty. Did they?

Question 10

What right does a guarantor or surety who pays the debt or obligation of the principal have, and what is this right called?

Question 11

Valley Bank and Trust Company provided financing to an automobile dealership to purchase cars. Valley had a security interest in the dealership's motor vehicle inventory and its proceeds. Valley perfected this interest by filing a financing statement with the secretary of state. Holyoke Community Federal Credit Union provided funding for three vehicles to customers of the dealership and filed security agreements to perfect its security interest in the vehicles. Valley discovered that the dealership sold those vehicles without remitting the proceeds to it. A lawsuit between Valley and Holyoke ensued. Whose security interest was superior?

Question 12

What is the impact on a surety when a creditor fails to compel payment when due?

Question 13

After Union Indemnity Insurance Co. became insolvent, 43 West 61st Street Associates (Associates) filed a claim against the company. Union had issued a performance bond covering the performance of LSR Electrical Construction Co. (LSR). Associates alleged that LSR defaulted in its performance under a construction contract, and in November Associates had Luis Electrical Contracting Corp. (Luis) complete the work. Evidence showed that both LSR and Luis had the same address; there was no paper trail documenting a default by LSR; Associates paid LSR after its alleged default in May; and Luis was involved in the work in May. If LSR had not defaulted, substituting Luis for the work was a material alteration of the contract that Union bonded. Should the claim be disallowed?

Question 14

Under what circumstances will the creditor's extension of the time of the debt discharge a surety or guarantor?

Question 15

While living in Kansas, Roger Moddelmog bought a pickup truck on which Boeing Wichita Credit Union (BWCU) held a security interest. The state of Kansas issued a certificate of title for the truck, listing BWCU as a lienholder. Moddelmog then moved to Colorado and, without BWCU's knowledge, surrendered the Kansas title to apply for a Colorado title. A Colorado title was issued that, for unknown reasons, did not include the BWCU lien. Moddelmog then moved back to Kansas and applied for a new Kansas title. This title also did not show BWCU's lien. When Moddelmog went through bankruptcy, BWCU claimed it had a perfected lien on the truck. Did it?

Question 16

How long must collateral be held for the benefit of a surety?

Question 17

How may a buyer (debtor) who wants to determine the amount owed get such a determination from the seller (creditor)?