Secured Transactions Problems

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PROBLEM 263
Assume that a state statute gives someone doing repairs a possessory artisan’s lien on the property repaired. Mr. Baker took his car into Mack’s Garage for repair but, being strapped for funds, couldn’t pay the full bill, and Mack wouldn’t let him have the car back. Is Mack’s artisan’s lien an Article 9 security interest? See §9-109(d)(2). If, prior to the repair work, Mr. Baker signed a statement giving Mack’s Garage a right to repossess the car if the bill wasn’t paid, does this agreement create a security interest under the Code? See §9-109(a)(1).

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PROBLEM 263:
Mack's artisan's lien is not covered by Article 9, see '9 109(d)(2) [cf. '9 333], which regulates consensual liens only. See Official Comment 10 to '9 109. As to the second question, the signed agreement would create an Article 9 security interest, since it arises by the consent of the parties, and Mack's Garage would have to perfect it in the appropriate Article 9 manner.

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PROBLEM 264
To raise money, Farmer Brown’s Fresh Vegetables Roadside Stand sold all of its accounts receivable to Nightflyer Finance Company, which notified the customers that henceforth all payments should be made directly to Nightflyer. (Note that this is not a loan from the finance company to the farmer with the accounts put up as collateral; it is an outright sale. If it were a loan, and if the collectible accounts exceeded the amount of the loan, the excess would be returned to Farmer Brown; in an actual sale Nightflyer can keep the surplus. See §9-608(b).) Is this sale nonetheless an Article 9 “security interest” ? See §9-109(a)(3). If so, even though Farmer Brown has no further obligations to Nightflyer, he would of necessity be termed an Article 9 “debtor.” See §9-102(a)(28)(B). Then Nightflyer would have to file an Article 9 financing statement to perfect its interest against later parties. Why would the Code drafters have brought an outright sale of accounts (and chattel paper, payment intangibles, and promissory notes, all defined below) under the coverage of Article 9? Remember Benedict v. Ratner? See Official Comment 4 to §9-109; Major’s Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 26 U.C.C. Rep. Serv. 1319 (3d Cir. 1979).

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PROBLEM 264:
Rights in accounts (whether rights by purchase or rights as lender) are all subject to Article 9 because interests in accounts are hard to discover unless the law imposes some sort of public notice procedure. If an outright sale of accounts were excluded, Farmer Brown could easily defraud his creditors by selling the accounts to Nightflyer and then using them as collateral for a loan from a second financing agency. Including such sales within Article 9 and requiring a filing for perfection of the sale insures the kind of public notice that prevents this sort of duplicity. But note '9 109(d)(4) and (7); see Official Comment 4.

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PROBLEM 265
Antiques R Us was the largest antiques store in the city, well known as a place where antique dealers could hire out space and exhibit their wares, with the store handling the sales and taking a commission on each one and returning to the dealers items that remained unsold. When the store takes out a loan from Octopus National Bank and uses as collateral “all its property,” will the bank’s security interest reach the items in the store that belong to the dealers if the dealers have never taken the steps required of consignors under Article 9? See §9-102(a)(20)(A)(iii).

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PROBLEM 265:
Under the older versions of Article 9, there were complicated tests to determine whether a true consignor would have to comply with Article 9. Under the 1999 revision, the answer is that most consignors are treated as purchase money creditors who must take the usual Article 9 steps to protect their interests (those steps are discussed later in the text, pages 1003-1017). However, where, as in this Problem, the consignee is generally known by its creditors to be substantially engaged in selling the goods of others, the '9-102(a)(20)(A)(iii) definition of Aconsignor@ is not met, and Article 9 does not require the consignors to do anything to protect their interests, leaving the matter to other law. The common law generally allowed a true consignor to retrieve its goods from the claims of the consignee=s creditors, so they should prevail in the Problem against Octopus National Bank. See Ludwigh v. American Woolen Co., 231 U.S. 522 (1913).

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PROBLEM 266
When Luke Skywalker, an artisan who handcrafted his wares, finished creating a large jeweled sword, he took it down to Weapons of the World (WOW), a large gun and weapon dealer, which mostly sold items that it either manufactured itself or bought from other dealers around the globe. The sword was appraised as being worth over $25,000. Luke asked WOW to sell the sword for him. Is this an Article 9 consignment so that Luke needs to take Article 9 steps to protect himself from WOW’s other creditors who have an interest in the store’s inventory?

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PROBLEM 266:
Here the consignee is not known generally by its creditors to be substantially engaged in selling the goods of others, and this transaction otherwise meets the Code=s definition of a Aconsignment.@ Thus this is an Article 9 transaction, and Luke needs to take the usual Article 9 steps (those for taking a purchase money security interest in inventory, discussed later, pages 137-150 of the casebook).

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PROBLEM 267
BIG Machines, Inc. leased a duplicating machine to Connie’s Print Shop. The lease was for five years, and the rental payments over this period exactly equaled the current market price of the machine. The lease contract further provided that at the end of the five years Connie’s Print Shop might purchase the machine outright by paying BIG Machines five dollars. BIG Machines did not file an Article 9 financing statement. Thereafter Connie’s Print Shop borrowed money from the Octopus National Bank and signed a security agreement with the bank granting it an interest in all of the print shop’s “equipment.” Octopus National duly perfected its security interest by filing a financing statement in the appropriate place. When Connie’s Print Shop failed to repay the loan, Octopus National seized all the shop’s equipment, including the duplicating machine. In the lawsuit Octopus National Bank v. BIG Machines, Inc., who gets the machine? Read §1-203.

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PROBLEM 267:
The Problem is designed to demonstrate a clear situation of a sale disguised as a lease. If we decide that $10,000 is (at least in this context) a nominal amount , then a disguised sale has occurred. Certainly if the copier only has a five year life span, this so-called lease is obviously an unperfected security interest, so ONB wins.

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PROBLEM 268
Business Corporation leased a massive copier from Copies, Inc. for a five-year period. At the outset of the lease the copier had a fair market value of $300,000 and a predicted ten-year useful life. Over the course of the five-year lease the rental payments would total to $330,000. The lease provides that Business Corporation has the option to become the owner of the copier at the end of the five-year period by paying Copies, Inc. the amount of $10,000. Is this a true lease or a secured sale? Would we reach a different result if the copier’s useful life were only five years?

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PROBLEM 268:
This is a true lease. Granted that Business Corporation is paying full market value for the copier in the form of lease payments, but the definition of a security interest makes that irrelevant. The key element on which to focus is that the copier has substantial useful life left at the end of the lease period, so there is still a property interest in the goods of value to the lessor and for which the lessee might legitimately wish to bargain. Change the facts so that the copier has only a five year useful life, and this so-called "lease" would in reality be a credit sale in disguise.

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PROBLEM 269
When Mercy Hospital’s administrators decided to build a new addition, they hired a general contractor named Crash Construction Co. and required it to get a surety to guaranty the performance of the construction job and the payment of all the workers and material suppliers (to avoid a mechanic’s lien on the hospital). Standard Surety issued such a performance and payment bond covering Crash’s obligation to Mercy Hospital. To finance the construction, Crash borrowed money from Octopus National Bank (ONB) and gave as collateral the right to collect the progress payments from Mercy Hospital as they came due. ONB duly filed an Article 9 financing statement. Halfway through the job, Crash went bankrupt, and Standard Surety had to finish and pay off the employees and suppliers. At this point, by virtue of the common law right to subrogation (the equitable right given to sureties to step into the legal shoes of persons they have paid), Standard Surety claimed a superior right to unpaid monies retained by Mercy Hospital, which were to be paid to Crash. ONB also claimed this fund, pointed to its filed security interest, and stated that Standard Surety’s subrogation right was only an unfiled Article 9 security interest. Who should win?

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PROBLEM 269:
The pedagogical purpose of this Problem is simply to illustrate the fact pattern in which the issue of subrogation qua security interest arises. The cited Kansas case demonstrates the uniform response of the courts, which has been to find that the equitable right of subrogation arises as a matter of law and not by consent of the parties and hence is not a security interest. The surety will prevail over the bank here even though it files nothing.

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PROBLEM 270
When Christopher Morley opened his bookshop, the landlord wanted security for the rent. They signed a lease agreement providing that all of the inventory (the books) would be subject to a lien in the landlord’s favor and could be seized and sold if Christopher defaulted in the rent payments. Is the landlord’s lien required to be perfected under Article 9?

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PROBLEM 270:
The point here is that consensual agreements giving rise to rights in collateral are required to be perfected under Article 9. Section 9 109 excludes from Article 9 coverage non consensual statutory liens arising by operation of law. Since the landlord=s lien arises by contract, Article 9 is triggered and the landlord must take the usual steps to achieve perfection of its security interest.

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PROBLEM 271
Carl Jugular was an independent insurance agent who sold policies for many companies, though his primary sales were the life and automobile policies of the Montana Insurance Association (MIA). In order to float a loan to buy a car, Carl gave the lending bank a security interest in “all present and future commissions earned or to be earned” from the MIA. Does Article 9 cover this assignment?

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PROBLEM 271:
A wage assignment would be exempt from Article 9, but an assignment of a contract right would not be. The key here is to define "wages." The cited case held these commissions were not wages, hence an Article 9 filing is required to perfect the creditor's interest.

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What must a security agreement contain?

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S/I Must:
1) Be Authenitcated by the debtor. §9-102(a)(7).

2) You must describe the collateral.

Recommended things:

1) Identify all perties
2) State your granting a security interest

3) Describe collaeral adequatly
4) State the other contractual duties.All remedies could be in the contract.

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What does a financing statement do and what does it require?

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Second Key Document is the financing statement:

1) Gives notice by filing in a specified place.
2) Does not have to be sighned.
3) Must identify the parties.
4) Must identify the collateral.

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What 3 requirements do you need for attachment?

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o (1) Parties must have an agreement which creates S/I.
 Show in 2 ways:
• (1) Show by possession collateral.
• (2) By looking for a signature in an agreement that is written. Usually looking for debtors authentication.
o (2) Value given by the Secured Party.
 Can sometimes be a preexisting debt.
o (3) Debtor must have rights in the collarteral.
• If you do not have all three then there is not attachment. There is a direct link from attachment to perfection.
• There are two separate rules.

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What are the 5 types of perfection?

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Perfection
1) Possesion or Pledge.
o If you’re a creditor and posess
2) Temporary perfection.
3) Automatic—no additional steps needed.
4) Filing—most common
5) Control—some items you cant posses so best method is controlling.

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Pb 296—Perfection by posession
Your client, Archibald Gracie, owns The White Star of England, a famous large diamond currently on display at the Astor Museum in New York. Molly Brown, a wealthy Colorado investor, has agreed to buy the diamond from Gracie, and she has made a substantial down payment, with an agreement to make three more payments before she gets possession. Gracie and Brown have signed the purchase agreement, which contains a clause granting him a security interest in his own diamond until she has made all the required payments. His question to you is this: can he perfect a security interest in the diamond by simply notifying the Astor Museum of the sale and telling the museum to hold it for his benefit until she makes payment in full, thus creating an escrow arrangement in which possession is held by the escrow agent? See §9-313(c), (f), and (g).

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No. The museum must authenticate a record acknowledgeing that they are going to hold posession for the secured parties benefit. The museum without acknowledgment, which it has no duty to do, does not constitute retention of possesion by the debtor

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Pb 297—Field Warehousing problem
Kiddie Delight, Inc., a manufacturer of toys, wanted to borrow money and use its inventory of toys as collateral. It called up Fred’s Field Warehouse Company, and Fred’s came to the plant, put the inventory in a locked room, and posted a sign on the door saying “Contents of Room Under Control of Fred’s Field Warehouse.” Fred’s then issued a negotiable warehouse receipt • deliverable to the order of Kiddie Delight. Fred’s hired Mort Menial, the Kiddie Delight janitor, as its local warehouse custodian (Mort was paid one dollar a week by Fred’s to mind the goods; he continued to receive his normal paycheck from Kiddie Delight). Kiddie Delight pledged the warehouse receipt (a document) to Mammon State Bank in return for a loan. Kiddie Delight , went bankrupt shortly thereafter.

a) Issue: Whether by having possession of the negotiable warehouse receipt gave the bank a perfected security interest in the the inventory?

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a. Rule: §9-312(a) and (c). And Comment 3.

b. Analysis: No. They needed to file it to have perfected it according to Comment 3 last sentence.

c. Option 1: 9-313 (c)

d. Option 2: 9-312(a)—bailor issues a negotiable document.argument is if disagreement of possession under 313(c) then you can say you have

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CONTINUED FROM LAST CARD
[TEMPORARY PERFECTION] Assume the warehouse receipt is validly issued and effective. If the bank and Kiddie Delight signed a written security agreement covering the warehouse receipt and the inventory it represented and if the bank gave Kiddie Delight the money,

Does the bank have a perfected security interest in the warehouse receipt even before the bank gets possession of it? (this is called temporary perfection).

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b. Rule: §9-312(e). [Temporary perfection: new value.] A security interest in certificated securities, negotiable documents, or instruments is perfected without filing or the taking of possession for a period of 20 days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement

c. Analysis: Yes. For 20 days. The bank and Kiddie have a security agreement and the bank has given value by giving kiddie the money

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CONTINUED FROM LAST CARD
c) If Kiddie Delight (prior to bankruptcy) wanted to get the warehouse receipt back from the bank in order to present it to the warehouseman (Mort), get the goods, clean them, return them to the field warehouse, and get back the receipt for rehypothecation to the bank,

ISSUE: will the bank lose its perfection if it turns the document over to the debtor?

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b. Rule: §9-312(f) Or MAYBE (g)?: [Temporary perfection: goods or documents made available to debtor.] A perfected security interest in a negotiable document or goods in possession of a bailee, other than one that has issued a negotiable document for the goods, remains perfected for 20 days without filing if the secured party makes available to the debtor the goods or documents representing the goods for the purpose of:

(1) ultimate sale or exchange; or

(2) loading, unloading, storing, shipping, transshipping, manufacturing, processing, or otherwise dealing with them in a manner preliminary to their sale or exchange.

c. ANALYSIS: No. The goods will remain perfected for 20 days if cleaning the goods is a manner preliminary to their sale or exchange

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CONTINUED FROM LAST CARD
If the bank loses its perfection, who would you advise it to sue?

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a. Rule: §7-204(a) A warehouse is liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances. Unless otherwise agreed, the warehouse is not liable for damages that could not have been avoided by the exercise of that care.
b. Analysis: fred’s field warehouse if they failed to excersice ordinary care.

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Karate, Inc. was a self-defense training school. It pledged 36 of the promissory notes given it by its customers to Nightflyer Finance Company In return for a loan. The parties signed a security agreement, and the finance company took possession of the notes. A month later Karate, Inc.’s president, Arnold Sun, asked Nightflyer to let him have back one of the Notes so that he could present it to the customer for payment (an Article 3 presentment). The finance company gave him the note on April 6. Sun put it in his desk at the school and forgot about it. On October 12 the karate school went bankrupt.

Does the bank have a perfected security interest in any or all of the promissory notes?

Could the finance company have protected itself by filing a financing statement as to the promissory notes?

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a. RULE: §9-312(g) and (h).
i. (g) [Temporary perfection: delivery of security certificate or instrument to debtor.] A perfected security interest in a certificated security or instrument remains perfected for 20 days without filing if the secured party delivers the security certificate or instrument to the debtor for the purpose of:

(1) ultimate sale or exchange; or

(2) presentation, collection, enforcement, renewal, or registration of transfer.

(h) [Expiration of temporary perfection.] After the 20-day period specified in subsection (e), (f), or (g) expires, perfection depends upon compliance with this article.
b. ANALYSIS: No Security interest. The security interest was only good for 20 days and here the 20 days has expired. They could either take possession or file a financing statement to perfect if past 20 days.

Could the finance company have protected itself by filing a financing statement as to the promissory notes?
a. RULE: §9-312(a).
b. ANALYSIS: YES.

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WHAT 2 WAYS CAN A PMSI ARISE?

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PMSI in Consumer Goods.
9-309—The security interest is perfected w/o any other steps.
2 ways PMSI arises:

1) Want to buy X in bestbuy and best buy loans you the money to buy and takes S/I in X.

2) You goto lender and get 3K for X and the lender takes S/I in the X, X is still from best buy.

So you can have A PMSI from seller or from someone else.

Key point—the credit or money is being made for purpose of acquiring the collateral

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Pb 300
Façade Motors decided to buy an expensive Oriental rug for its main office. It selected one from the stock of Treasures of Persia, Inc., which let Façade Motors take the rug back to the office to try it out to see if it wanted to buy the rug. All of the equipment of Façade Motors was covered by a perfected floating lien in favor of Octopus National Bank.

As soon as Façade gets possession of the rug (and before it makes up its corporate mind whether it wants to buy it) does the bank’s lien attach?

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• Rule: §2-326(1) and (2).
(1) Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is

(a) a "sale on approval" if the goods are delivered primarily for use, and

(b) a "sale or return" if the goods are delivered primarily for resale.

(2) Except as provided in subsection (3), goods held on approval are not subject to the claims of the buyer's creditors until acceptance; goods held on sale or return are subject to such claims while in the buyer's possession.

• Analysis: No. Façade motors must first accept the goods before they can be attached

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Façade Motors did decide to purchase the rug, so it signed a contract to do so with Treasures of Persia, Inc., making a down payment at the time it did so. To finance the rest of the installment payments, Façade Motors borrowed the necessary amount from Nightflyer Savings and Loan, giving it a security interest in the rug. Does Nightflyer’s security interest qualify as the purchase money kind?

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Rule: §9-103(a), its Official Comment 3—Last Paragraph. The concept of "purchase-money security interest" requires a close nexus between the acquisition of collateral and the secured obligation. Thus, a security interest does not qualify as a purchase-money security interest if a debtor acquires property on unsecured credit and subsequently creates the security interest to secure the purchase price.

• Analysis: NO. the debtor acquired property on unsecured credit when it put a down payment on the rug.

 Know what a floaing lein is.

 Look at 9-103 comment 3.

 Close Nexus Standard. If not a cloase nexus then not a purchase money kind.

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Pb 301
Octopus National Bank sold all the promissory notes it was holding in its vault to Last National Bank. Remember that the sale of promissory notes is an Article 9 transaction (with the seller being the “debtor” and the buyer the “secured party” – see §9-109(a)(3)). Must Last National file a financing statement or make sure it has possession in order to perfect its security interest in the notes?

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• Rule: §9-309(4). Comment 4. “Any person who regularly takes assignments of any debtor's accounts or payment intangibles should file.”

• Analysis: No. They do not need to file. Last National Bank is automatically perfected on attachment.

 The sale of a promissory note is an article 9 transaction. This qualifies for automatic perfection. “perfect when they attach” so inorder to get it you must meet the attachment standards.312(a) has some items.

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Pb 302
When Nightflyer Finance Company (NFC) loaned $20,000 to Portia Moot to enable her to expand her law practice, she gave the finance company a security interest in her accounts receivable (the monies her client owed her), Which Nightflyer promptly perfected by filing a financing statement in the appropriate place. One of these accounts has a surety, the mother of the client, who promised Portia that she would pay the debt if the client did not. What must NFC do to perfect its interest in the surety obligation of the mother? See §§9-102(a)(77), 9-102(a)(71), 9-203(f), and 9-308(d). Note that under the cited definitions, the same rule for automatic perfection extends to letters of credit that support the original transaction.

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• Rule:
o 9-308(d) [Supporting obligation.] Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral.

o (a) 9-102(a)(77)(“supporting obligation” means a ...secondary obligation that supports the payment o an account.”)

o (b) 9-102(a)(71)(“Secondary obligor means an obligor to the extent that the obligor’s obligation is secondary.”)

o (c) 9-203(f)(“attachment of a SI in collateral ...is attachment of a SI in a supporting obligation for the collateral”) OC 8 A SI in a supporting obligation automatically follows from a SI in the underlying, supported obligation

• Analysis: Nothing. When they perfected their S/I the supporting obligation was also perfected.

 9203 f attachment of supporting obligation.

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Pb 304
Octopus National Bank (ONB) had a security interest in the equipment -. Of the Weekend Construction Company for which it filed a financing statement in the proper place on May 1, 2009. Antitrust National Bank took a security interest in the same collateral and filed its financing statement on May 2, 2009, in the same place.

a. How long is a financing statement effective?

b. If ONB files a continuation statement on May 1, 2006, is its perfected , position continued? See §§9-515(d), 9-510(c). Pre-revision decisions caHed • this the problem of “premature renewal”

c. If ONB never files a continuation statement at all, after May 1, 2014, does it nonetheless retain its priority over ANB lwho, after all, always thought • of itself as junior to ONB’s prior filing and would get a windfall if it suddenly • prevails)? See §9-515(c).

d. I If ONB fails to file a continuation statement in time, so that its perfection lapses, but a week later it files another financing statement, is it still senior to ANB?

e. Is an attorney who fails to file a continuation statement guilty of malpractice? .

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3. Analysis:

a. 5 years

b. No. Nov 1, 2013-may 1, 2014.

c. No. It is deemed never to have been perfected agianst a purchaser of the collateral for value. The effectiveness lapses.

d. No.(not sure of the answer here)

e. Yes.

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Pb 305—Termination statement and damages.

When Portia Moot paid off her debt to Last National Bank, which had loaned her $3,000 to buy a computer for her law office (and taken a purchase money security interest therein, for which it had duly filed a financing statement), she wanted the bank to clear up the records down at the filing office. Does she have this right? See §9-513. What can she do if they stiff-arm her?

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1) Issue: Whether Portia has the right to clear up the records down at the filing office and what can she do if they stiff arm her?

2) Rule: §9-513(c), §9-625(b) and (e)(4)

3) Analysis: the computer should be classified as equipment. So its not a consumer good and (a) doesn’t apply, so (c) applies and portia must take an initiave to file the termination statement by a authenticated demand and the SP must w/n 20 days send or file a termination statement. If they don’t then under §9-625(b) & (e)(4) portia may recover any loss caused by failure to comply and 500$ under (e)(4).

 9-509(d)(2)—amendment serves as termination statement

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Pb 322 [pg. 879]—illustrates pmsi v. creditor and concept of identifying collateral
When Paramount Homes finished building “Utopia, Ltd.,” its newest fancy apartment complex, it had to furnish the clubhouse, so it sent its con. Struction manager, Bill Gilbert, to Sophy’s Interiors, a furniture store, where he made $2,000 worth of credit purchases and signed a security agreement on behalf of Paramount Homes in favor of the seller. The agreement was signed on June 8; the goods were delivered that same day. Bill failed to mention that , all his employer’s equipment was designated as collateral on an existing security agreement and financing statement in favor of Sullivan National Bank. This agreement contained an “after-acquired property” clause, which stated that later similar collateral coming into the buyer’s estate would automatically fall under the bank’s security interest. (See §9-204(a).) The policy of Sophy’s Interiors was not to file financing statements for its credit furniture sales.

(a) Why might it have such a policy? Is it wise here?

(b) On June 10, which creditor will have priority in the furniture? On June 30?

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(a) Why might it have such a policy? Is it wise here?
• Under 9-309(1) they have the policy not to file because usually furniture is consumer goods and therefore doesn’t require the filing of a SI to be perfected. Doing so would be unnecessary expense. here it is unwise because it’s not clear that the furniture would be classified as “consumer goods.”

(b) On June 10, which creditor will have priority in the furniture? On June 30?
• Under 9-324(a), On June 10, Sophy’s will have priority. On June 30, Bank will have priority if files w/n 20 days. [bank has a 20 day grace period for non-consumer goods. The goods were purchased on June 8, so the bank has until June 28 to file, after which it loses it SI priority.]

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Pb 323[882] Unperfected v. Perfected.
Video Wonder, an electronics store, had granted a floating lien over its inventory and equipment to Last National Bank, which perfected its security interest by filing a financing statement in the appropriate place. Needing a guard dog for the store, Video Wonder’s manager responded to an ad in the newspaper placed by Agatha Shaw, who was selling her beloved German shepherd, Fang. She had bought him for protection when he was but a pup, but he had proven too much for her, having seriously injured a meter reader and two mail carriers. She checked out the store carefully before agreeing to sell Video Wonder the dog, saying she wanted a good home for Fang. He cost the store $1,200. The manager agreed to send her $100 a month unti I the dog was paid for, at which time she agreed in writing to sign over Fang’s papers. Ms. Shaw and the manager agreed that the store would not get any title to Fang until all the payments had been made. Fang proved to be a fine watchdog for the store, but when Video Wonder stopped making payments to all creditors two months later, Last National Bank seized all of the store’s assets, including Fang. Agatha Shaw is upset. She calls you, her attorney. Is there any hope for her? Can she argue that the bank’s security interest only attached to Video Wonder’s equity in the dog, or that until Video Wonder had paid the entire debt, it had no property interest to which the bank’s floating lien could attach?

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1) Issue: . Is there any hope for her? Can she argue that the bank’s security interest only attached to Video Wonder’s equity in the dog, or that until Video Wonder had paid the entire debt, it had no property interest to which the bank’s floating lien could attach?

2) Analysis: the dog was “equipment.” This is not consumer goods. Agatha Shaw forgot to file. She would be ok for 20 days. She also has to give notice. Store had not paid full price for dog, doesn’t matter.

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PROBLEM 324—When 20 days actually starts.
Hart Farm Equipment leased a construction backhoe to Farmer Bean for a six-month period with the understanding that Farmer Bean would be given the option to purchase the backhoe at any time during that period, and, in fact, the lease at one point called this a “sale on approval.” Farmer Bean’s equipment was already subject to a perfected floating lien in favor of Octopus National Bank. Three months after the delivery of the backhoe, Farmer Bean agreed to buy the backhoe, and Hart Farm Equipment filed its financing statement the next day, claiming its purchase money security interest. Who wins in the priority battle between Hart Farm Equipment and Octopus National Bank?

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1) Rule:
a. §2-326(2) Except as provided in subsection (3), goods held on approval are not subject to the claims of the buyer's creditors until acceptance; goods held on sale or return are subject to such claims while in the buyer's possession.
b. §9-324 OC3.

2) Analysis: Hart With the PMSI wins b/c it filied w/n the 20 day grace period after the goods became collateral and deemed in possession.

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PROBLEM 325
The Merchants Credit Association held a perfected security interest in the inventory of Harold’s Clothing Store. Harold went to a fashion showing in New York and contracted to buy $4,000 worth of new clothes for resale; the seller was to be Madame Belinda’s Fashions, Inc., which took a purchase money security interest in the clothes on December 10, the date of sale. Madame Belinda herself wrote the Merchants Credit Association on December 11 and informed the credit manager of the sale. He protested but did nothing. Madame Belinda filed on December 11; the goods were deIivered to the store on December 12.

(a) Who has priority?

(b) If the notice was received on December 11, as above, is it sufficient to permit Madame Belinda to keep selling goods to Harold for an indefinite period thereafter or only for this one transaction?

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(a) Who has priority?
• Madame b/c she gave notice and filed w/n 20 days.

(b) If the notice was received on December 11, as above, is it sufficient to permit Madame Belinda to keep selling goods to Harold for an indefinite period thereafter or only for this one transaction? See
• RULE: §9-324(b)(3).
• Analysis: the notice is good for 5 years, so after 5 years you should give more notice.

9-324, filing is sufficient for perfection in PMSI. The rule is trying to perfect the first creditor.

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PROBLEM 326
Hans Racing Equipment bought much of its inventory from Standard Auto Wholesales, Inc., which always took a purchase money security interest in the goods sold to Hans and which filed a financing statement on the same day. Hans also borrowed money from the Matching Dishes National Bank (MDNB) to finance the purchase of inventory from wholesalers, part of which was used to payoff Standard Auto. MONB filed a financing statement, claiming a security interest in Hans’s inventory. On March 28, Hans contracted to buy $3,000 in goods from Standard, making a down payment of $1,500 and giving Standard a purchase money security interest in the goods for the rest. On that same day he borrowed the $1,500 down payment from MDNB and also gave the bank a purchase money security interest in the same goods. Both creditors knew of the other, so they both sent written notice to each other. The goods were delivered to Hans on April 2. Which creditor has priority?

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1) Issue: Which creditor has priority?

2) Rule: §9-324(g) And OC 13.

3) Analysis: Standard wins. because it is the seller of the goods and therefore has a PMSI. It enables him to acquire. In OC 13 talks about favoring the vendor. Equities favor the vendor

Hans—Debtor
PMSI in Vendor v. PMSI in Bank.—PMSI in vendor wins.

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WHAT ARE THE 3 WAYS TO HOLD INVESTMENT PROPERTY?

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3 Ways to hold investmen property:
1. Certificated security
a. Taking delivery
b. Filing
c. control
2. Uncertificated security
a. Artificially taking delivery
b. Filing
c. control
3. Security entitlement holder
A secured party with control will take priority of someone has filed.

Control is defined in 8-106

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PROBLEM 331—garden variety
Betty Consumer bought a television set from Distortion TV, Inc., a retail store. A month later Distortion went bankrupt, and a minor functionary from the Octopus National Bank (ONB) showed up on her stoop and asked her to turn over the set. He explained that ONB held a perfected security interest in all of Distortion’s inventory and that since Distortion had not paid off its debts to ONB, the bank was repossessing.

(a) What should Ms. Consumer tell the bank’s flunky?

(b) Would it matter if she had known that ONB had a perfected security interest in Distortion’s inventory?

(c) Would it matter if she bought at a “liquidation Sale” and was informed by the store’s owner that the store planned to file a bankruptcy petition the following week?

(d) What if Ms. Consumer had put the TV on “layaway” and had paid , 50 percent of the price but permitted Distortion to keep the TV (she signed a contract obligating herself to pay the balance), and then the store filed for bankruptcy?

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(a) What should Ms. Consumer tell the bank’s flunky? See §9-320(a).
• Ms. Consumer should tell them that under §9-320(a) she is a buyer in the ordinary course of business and therefore takes free of a security interest created by the buyers seller. She says See you later! (CA)
• Deller is Distortion TV and they are in a security agreement with ONB.

(b) Would it matter if she had known that ONB had a perfected security interest in Distortion’s inventory?
• OC 3: “…Subsection (a) provides that such a buyer takes free of a security interest, even though perfected, and even though the buyer knows the security interest exists. Reading the definition together with the rule of law results in the buyer's taking free if the buyer merely knows that a security interest covers the goods but taking subject if the buyer knows, in addition, that the sale violates a term in an agreement with the secured party.”
• Here is does not matter if she had known of ONB’s perfected Security interest. It would matter if she knew of the perfected security interest and that the sale violated a term in an agreement with a secured party.

(c) Would it matter if she bought at a “liquidation Sale” and was informed by the store’s owner that the store planned to file a bankruptcy petition the following week?
• No as long as she gets delivery. It doesn’t matter if she would have purchased this at a liquidation sale. As long as she is in good faith and not in some scheme taking advantage of the fact that there is bankruptcy looming then she would still be okay.

(d) What if Ms. Consumer had put the TV on “layaway” and had paid , 50 percent of the price but permitted Distortion to keep the TV (she signed a contract obligating herself to pay the balance), and then the store filed for bankruptcy?
• A: §2-502—She can recover her money. Prof says that when she sees “them” she see it to mean you can take the good and priority of money upt to two thousand something.

• For Exam--So if we see BOCB in fact pattern don’t really worry if its from layaway.

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PROBLEM 332—When Seller still in posession.
Deering Milliken was a textile manufacturer. It routinely sold textiles on credit to Mill Fabrics, a firm that finished the textiles into dyed and patterned fabrics. It was Mill Fabrics’ practice to resell the fabrics to Tanbro Fabrics, a wholesaler. While the textiles were still in Deering’s warehouse, Mill Fabrics contracted to buy them from Deering, signing a security agreement to that effect and giving Deering a financing statement, which it duly filed. In turn, Mill Fabrics sold the textiles to Tanbro, which paid Mill Fabrics for them, but delayed taking delivery for a few weeks, so that the fabrics remained in Deering’s possession. Deals of this kind were common in the textile industry, and all parties knew of the others’ interest. Unfortunately, Mill Fabrics became insolvent and never paid Deering for the textiles, and Deering therefore refused to deliver them to Tanbro. The latter sued. Who should prevail?

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• OC 8. Possessory Security Interests. Subsection (e) is new. It rejects the holding of Tanbro Fabrics Corp. v. Deering Milliken, Inc., 350 N.E.2d 590 (N.Y. 1976) and, together with Section 9-317(b), prevents a buyer of goods collateral from taking free of a security interest if the collateral is in the possession of the secured party. "The secured party" referred in subsection (e) is the holder of the security interest referred to in subsection (a) or (b). Section 9-313 determines whether a secured party is in possession for purposes of this section. Under some circumstances, Section 9-313 provides that a secured party is in possession of collateral even if the collateral is in the physical possession of a third party.

• A: Buyer of goods collateral prevented from taking free of a SI if collateral is in possession of the secured party. This is an exception w/n an exception. If particular good you buy is still in the sellers possession then you don’t take free of any security interest. The goods are still with seller even though Buyer has paid for them.

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PROBLEM 333—Buyers pays with check for pre existing debt.
Octopus National Bank (ONB) had a perfected security interest in all cars on Smiles Motors’ lot. Smiles owed $5,000 in past due insurance premiums to its insurance agent, Howard Teeth, who showed up one morning to buy a new car from Smiles. The president of Smiles first gave Howard a check for $5,000, but Howard endorsed it back over to Smi les when he saw a new car he wanted to buy. Is Howard a §1-201 (a)(9) “buyer in the ordinary course of business” so as to take free of ONB’s security interest?

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• No, this is acquiring the goods in satisfaction of a prior debt so there cannot be a BIOCOB here. The Key is that there was no new value given. When you sell inventory you get “proceeds”. The check here was for prior debt and it was not for proceeds of inventory, but the sale is really going payment of insurance debt. For Art. 9 purposes they want a creation of a S/I and relinquish a S/I so they want to keep the nature of that transaction separate from others even though the money is going into the same pot.

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PROBLEM 334
Arthur Greenbaum bought a new car on credit from Lorri’s Car City, which took a purchase money security interest in the vehicle, perfecting same by notation of its lien interest on the certificate of title, as required by state law. Arthur was a used car dealer by profession, but he had purchased the car for his own private use. Nonetheless, he frequently parked the car on his lot, and one day sold it for cash to Ann Matheson, a customer in search of a good used car. Arthur did not mention to her that it was his personal car. When everyone learned what had happened, Ann sued Lorri’s Car City, demanding that it release the title. What result?

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• Ann is a buyer in the ordinary course here; Is Lori’s out of luck here? The SI remains perfected in the proceeds so they should go back after Arthur for the proceeds. She would not qualify under 9-320(b) because she knew.

Case Cited:
o OVERVIEW: The lender filed a notice of lien with the state director of revenue, but it did not file a financing statement or any other document. The director later issued a duplicate title for the car, which did not include the lender's lien. The duplicate title contained a forged signature. The car was assigned to an auto dealer. The debtor negotiated a sale of the car to the buyer and signed the title as the auto dealer's agent. The buyer was unaware of the lender's lien and thereafter sold the car. On appeal, the court affirmed. Although the lender's notice of appeal failed to cite the specific rule under which it was authorized, the court held that notice of appeal was timely. Under Mo. Rev. Stat. 400.9-311(d), perfection of a security interest for collateral that was inventory could only be done by filing a financing statement. The lender's perfection under the certificate-of-title statute was ineffective. Section 400.9-311(d) applied as the debtor held the car as inventory when the lender made the loan. The debtor was in the business of selling cars. The auto dealer never held title as the signature on the duplicate title was forged. The debtor actually sold the car to the buyer.

OUTCOME: The court affirmed the lower court's judgment.

 When you see “on credit” look for PMSI.

 §9-320(a)—(all goods except farm products)
o She is a buyer. Its okay she knows about the S/I. And the S/I needs to be b/w the buyer and seller. And in this type of business,
 §9-320(b)—Consumer goods exception. If it falls under (b) then you win even when perfected.
 Generally 3 Types of buyers.
o BOCB—§9-320(b)
o 3 C—concumer to consumer for consumer purpose §9-320(b)
o BFP
 Looking for a buyer to win at the priority statge and not the perfection stage

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PROBLEM 335
Wonder Spa, Inc., pledged 50 of its promissory notes to the Conservative State Bank and Trust Company (CSBTC) in return for a loan. The bank took possession of the notes. The spa asked to have 10 of the notes back for presentment to the makers for payment, and the bank duly turned over the notes, which Wonder Spa sold (discounted) to Octopus National Bank (ONB), a bona fide purchaser without knowledge of CSBTC’s interest. This resale was in direct violation of the spa’s agreement with CSBTC. Which bank is entitled to the instruments? Read §§9-312(g) and 9-331. Is ONB one of the parties protected by §9-331? See §§3-302 and 3-305.

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• 9-312(g) [Temporary perfection: delivery of security certificate or instrument to debtor.] A perfected security interest in a certificated security or instrument remains perfected for 20 days without filing if the secured party delivers the security certificate or instrument to the debtor for the purpose of:

(1) ultimate sale or exchange; or

(2) presentation, collection, enforcement, renewal, or registration of transfer.

• §9-331—HDC takes priority over an earlier security interest, even if perfected to extend provided in art 3,7, and 8.

• ONB is entitled to the instruments as an HDC. And yes they are protected by by 9-331. Article 9 will not hiinder rights established under art 3, 7, and 8.
• The bank is not extending credit here, its actually the purchaser. How would the subsequent buyer know it was in violation of the agreement? If the agreement was on the face of the note.
• There is a 20 day window that CSBTC that athey are okay. However, if they don’t file or get it back then they are unperfected.
• What kind of buyer is ONB?—Under Article 3 they are an HDC, and thus ONB gets paid because

Front 38

PROBLEM 336
Andy Audio bought a stereo receiver on credit from Voice of Japan, Inc., an electronics store, giving it a purchase money security interest in the receiver. Voice of Japan did not file a financing statement. Six months later, when Andy still owed Voice of Japan $300, he held a garage sale and sold the receiver to Nancy Neighbor for $200 cash. If Andy stops making payments to Voice of Japan, can it repossess the receiver from Nancy?

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• Rule: 9-320(b)
o OC5: “…As to purchase money-security interests which are perfected without filing under Section 9-309(1): A secured party may file a financing statement, although filing is not required for perfection. If the secured party does file, all buyers take subject to the security interest. If the secured party does not file, a buyer who meets the qualifications stated in the preceding paragraph takes free of the security interest.(qualifications in9-320(b))”
• A: NO. Nancy meets the qualifications and therefore takes free of the security interest.

 9-320(b) Section. Very narrow. When fct pattern w/ inventory look for BOCB. If consumer good look for purchaser that might buy. As long as Nancy is without knowlegde, using for personal use, before voice of japan files, then she beats out voice of japan. If the Consumer good automatically perfected creditor files even though they don’t have too then its another layer of protection and they would beat out nancy. But if they don’t file then Nancy wins.

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PROBLEM 337
The Repossession Finance Company had a perfected (filed) security “’. Interest in the equipment of White Truck Ice Cream (WTIC), Inc. (the company sold ice cream to children from trucks that traveled through the city’s neighborhoods). Though technically a corporation, WTIC was in actuality a family business, and Bill White-Truck himself frequently drove one of the trucks. One day while making his rounds, Bill met Frank Family, a consumer who asked about buying an ice-cream-making machine for his family. Bill , promptly sold him one of the machines the company owned, for which Frank paid cash. When WTIC failed to make its payments, the finance company lived up to its name and repossessed all equipment. When Frank refused to turn over the ice cream machine, Repossession sued him for conversion (a tort that does not require scienter or guilty knowledge for its commission). Answer these questions:

(a) Does he lose?

(b) Would we get a different result if the bank’s interest were unperfected at the time of the sale?

(c) Would we get a different result if the bank knew and approved of the sale?

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(a) Does he lose? Compare §§9-201, 9-401 (b), and 9-315(a)(1) and Production Credit Assn. v. Nowatzski, 90 Wis. 2d 344, 280 N.W.2d 118, 26 U.c.c. Rep. Serv. 1338 (1979).
• 9-315(a)(1). Yes, buyer takes subject to the SI. Not “ordinary course of business” because seller was not in business of selling ice cream machines, only ice cream.
• Not a 3 c because seller is not consumer.
• 9-315 (a) security interest is not lost, 9-201—the security agreement is effective agianst purchaser so BFP generally going to take subject to S/I and Agreement and its going to follow the collateral. If you take it after it been perfected then you have a junior interest.BFP a watered down purchaser because they take subject to the interest and wont beat out creditor.

(b) Would we get a different result if the bank’s interest were unperfected at the time of the sale? See §9-317(b).
• §9-317(b)
• Yes, frank would take free of the security interest.

(c) Would we get a different result if the bank knew and approved of the sale? Compare §9-31 5 (a) (1 ); RFC Capital Corp. v. Earthlink, Inc., 2004 WL 2980402, 55 U .c.c. Rep. Serv. 2d 617 (Ohio App. 2004).
• §9-315(a)(1) and (2)
• If the bank authorized the sale free of the security interest and the interest attaches to any identifable proceeds of the collateral then the security interest would not continue in the collateral.

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What does Article 9 Classify a bankruptcy trustee as?

Back 40

Judicial Lien Creditor

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PROBLEM 361—Bankruptcy
Lew Sun, a Korean, moved to Chicago and opened a Korean restaurant called “Seoul Food”. He had many unsecured creditors (food sellers, linen services, employees, etc.). On April17, he applied to the International State Bank for a loan of $10,000, signing a security agreement in favor of the bank, securing the loan by an interest in Sun’s equipment. On April 18, one hour before the bank filed the financing statement, Sun filed a bankruptcy petition In the federal court;

(a) If no new general creditors came into existence between the loan on April 17 and the petition filing on April 18, can the trustee avoid the bank’s security interest under §544(a) of the Code?

(b) What result if the bank had filed its financing statement two seconds before the bankruptcy petition was filed?

(c) If the bank’s interest had been a purchase money security interest, would the filing of the bankruptcy petition have cut off the usual 20-day grace period?

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(a) If no new general creditors came into existence between the loan on April 17 and the petition filing on April 18, can the trustee avoid the bank’s security interest under §544(a) of the Code? See In re Millivision, Inc., 331 B.R. 515 (Bankr. D. Mass. 2005).
• YES. Under §544(a)(1).
• §(a) is commonly reffered to as the strong arm clause.
• Banks interest is perfected.

(b) What result if the bank had filed its financing statement two seconds before the bankruptcy petition was filed?
• §547(c)(1)—Bank is still okay. At the time the petition had been filed is when to determine for the bank.your more likley to prevail if you’re a perfected creditor

(c) If the bank’s interest had been a purchase money security interest, would the filing of the bankruptcy petition have cut off the usual 20-day grace period?
• No.§546(b)(1)(B)
• §546. Limitations on Avoiding Powers
o • .. (b)(l) The rights and powers of the trustee under section 544, 545, or 549 of this title are subject to any generally applicable law that—
 (A) permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection; or
 (B) provides for the maintenance or continuation of perfection of an interest in property to be effective against an entity that acquires rights in such property before the date on which action is taken to effect such maintenance or continuation.

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Andy Doria was the owner of 100 shares of Titanic Telephone, which he pledged to the Morro Castle National Bank as collateral for a $10,000 loan. At the time of the pledge, the stock was selling for $100 a share. The security agreement was oral, and the bank filed no financing statement

(a) If the stock began to fall in value and if on November 4, when it was selling at $80 a share, Andy called the bank and told the bank to sell, is the bank responsible if it does not and the stock bottoms out at $1.50 a share?

(b) Would it help the bank’s position if the pledge agreement contained a clause saying that the bank was not responsible for its own negligence in dealing with the stock?

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(a): • A: NO. According to the case and 9-207 the bank did not fail to exercise reasonable care.
• 9-203 allows for an oral security agreemnt like in the case with pledge.
• The code does not require the secured party to act here, just exercise reasonable care. Banks not req’d and put on standard of having to watch the stock market.
• There is a very loose standard w/ secured parties responsibility and article 9 is not going to put an unreasonable duty on the secured party in this

(b): • Comment 2 to §9-207: “…Under Section 1-102 the duty to exercise reasonable care may not be disclaimed by agreement, although under that section the parties remain free to determine by agreement standards that are not manifestly unreasonable as to what constitutes reasonable care…”
• NO. they cannot disclaim, but they can alter the standards.

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(c) Andy’s dealings with the bank became more complicated, and eventually the bank held, as pledgee, Andy’s stocks in five different companies. One of these, Lusitania Foundry, offered a stock split option that had to be exercised by December 31, so Andy wrote the Morro Castle National Bank and, explaining that his records had become confused, asked the bank how many shares of Lusitania Foundry it held. The bank replied that it possessed 50 shares (this was a typographical error; it actually held 150). Andy tendered 50 shares of equivalent stock to the bank in exchange for a return of 50 shares of Lusitania Foundry, on which he then exercised the stock option, which proved very profitable. On january 3, Andy learned he owned 100 more shares that the bank held; it was too late to take the stock option on these shares. Does Andy have a cause of action against the bank under §9-207? Under §9-210? What damages can he recover?

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• Yes. COA Under 9-210(a)(3) this is a “request regarding a list of collateral. The bank had had to send the debtor an authenticates record including a statement to that effect w/n 14 days after receipt.
• Under 9-625(b) he may recover any loss caused by the failure to conform to art. 9. Under subsection (f) he may recover $500. Also Comment 5 explains (f). (f) is punative damages.
• §9-207—no typos.

Front 44

PROBLEM 375
Mazie Minkus borrowed $2,000 from the Mount Brown State Bank and, as collateral, pledged to the bank her stamp collection (valued at $2,000). She used the money for a South American vacation. While she was away, the bank, which was located in an unstable geological area, was destroyed in an earthquake. The stamp collection went with it. Fortunately, the bank was fully insured by a policy with the Gibbons Insurance Company, which, inter alia, paid the bank $2,000 for the loss of the stamp collection. Gibbons then notified Mazie that she should pay the $2,000 debt to the insurance company, which was using the doctrine of subrogation to step into the shoes of the bank. Need she pay?

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• Rule: §9-207(b)(2): (b) [Expenses, risks, duties, and rights when secured party in possession.] Except as otherwise provided in subsection (d), if a secured party has possession of collateral:(2) the risk of accidental loss or damage is on the debtor to the extent of a deficiency in any effective insurance coverage
• A: NO.
When you see a buyer and inventory think of BOCB. When you see a buyer and a consumer good then look to (a)(3).
When BFP purchases collateral the S/I continues with the collateral. BFP only takes free if the creditor has not perfected yet.

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PROBLEM 377
Natty Birdwhistle bought a car with money borrowed from Carpe Diem Finance Company (which perfected its interest in the car). The security agreement provided that “time was of the essence” and that the acceptance by the finance company of late payments was not a waiver of its right to repossess. Natty always paid 10 to 15 days late. One month Carpe Diem Finance had had enough, and it sent a man out who took the car (using a duplicate set of keys) from the parking lot of the factory where Natty worked.

Has a default occurred?

If Carpe Diem’s conduct has waived the right to repossess if Natty is late, what can it do to reinstate the “time is of the essence” clause?

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• ISSUE: Has a default occurred?

o Rule: MOE v. JOHN DEERE. OVERVIEW: A purchaser of a tractor financed the purchase amount by agreeing to make five equal yearly installments. The purchaser became delinquent in his payments. The original holder of the contract later assigned the contract to another entity, and the tractor was repossessed and sold. The court held that the original holder of the contract was not entitled to summary judgment on the claims of the purchaser. The court held that the purchaser breached the security agreement and the promissory note when he failed to timely make payment; however, the oral statements and conduct of the parties appeared to modify the written agreement. The court held that the repeated acceptance of late payments by a creditor who had the contractual right to repossess the property imposed a duty on the creditor to notify the debtor that strict compliance with the contract terms would be required before the creditor could lawfully repossess the collateral.

o Analysis: No because their conduct of accepting late payments imposed a duty on the creditor to notify debtor that strict compliance would be required before the creditor could lawfully reposses. Courts likley to say that she had been outside time is of the essence so there was no default.
• ISSUE: If Carpe Diem’s conduct has waived the right to repossess if Natty is late, what can it do to reinstate the “time is of the essence” clause?
o Rule: 2-209(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.
o Analysis: They may retract by giving reasonable notification that strict performance will be required of any term waived. Could be an argument that there was reliance show they cannot reinstate.
• To perfect PMSI in car you do it in the title.

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PROBLEM 378 [1028]
Don Jose was in charge of repossession for Carmen Motors. One Monday morning the dealership told him that cars owned by four debtors (Escamillo, Micaela, Zuniga, and Morales) were to be picked up because the buyers had missed payments. Look at §9-609, and answer this question: is Carmen Motors required to give the debtors notice that they are in default before repossessing? Don Jose visited each of the debtors with the following results

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• Notice is not required before reposessing. You have to give notice on default when there is going to be a resale

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(a) Don Jose found Escamillo's car parked in his driveway at 2:00 A.M.; he broke a car window, hot-wired the car, and drove it away. Has a breach of the peace occurred?

What if Escamillo heard the window break, rushed out, and began yelling?

May Don Jose continue the repossession, or must he quit? If he goes away, may he try again later that night?

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• NO. Stelthmethods alone are not a breach of the peace.
• “hey my car stop”—there is a confrontation with the repo man and then that is where the line is drawn w/ respect of breach of the peace. Its not even the debtor who has to be the one in confrontation or time or place, its looked at as fact specific.
• If he goes away he can try again later that night.

Front 48

(b) Don Jose showed up at Micaela's house accompanied by his brother (an off-duty sheriff who was wearing his sheriff's uniform). Don Jose told Micaela that he was repossessing the car, and she said nothing. Has a breach of the peace occurred?

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• Judicial v. Non judicial reposession.
• Yes there is a breach of the peach because they are using the assistance of law enforcement when not authorized to do so under judicial reposession so its shown as constructive breach of the peace by the use of force.

Front 49

© Don Jose broke into Zuniga’s garage through the use of the services of a locksmith. The garage lock and door were undamaged. A clause in the contract provided that the secured party had the right to enter the debtor’s premises to remove the property. Does the repossession comply with §9 609?

Back 49

• You cant contract away that when they enter its not a breach and
• Secured party cant go beyond the scope of art. 9 so you cant contract away the duty to not breach the peace

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(d) Don Jose phoned Morales and said that the car was being recalled because of an unsafe engine mount. Morales brought the car in that morning. When the time came to pick up the car, Don Jose simply smiled, said, "April Fool; it's been repossessed!" and refused to return it. is the re possession valid?

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• This is probably going to be okay unless your in a place like alabama—its view to be potentially acting in bad faith. But it is dependent upon what the jurisdiction does. But generally as long as you don’t breach the peace —standard—so it wouldn’t be a breach of peace here but there is an argument

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PROBLEM 379
Octopus National Bank (ONB) financed Mary Melody’s purchase of a new car, in which it perfected its security interest. The loan agreement provided that on default the bank had all the rights listed in Part 6 of Article 9 of the UCC and that the parties agreed that the bank would not be liable for conversion or otherwise if there were other items in the car at the time it was repossessed. Mary missed a payment, and ONB’s agent took the car in the dead of night from its parking place in front of her home. She protested the next day, claiming that her golf clubs were in the trunk. ONB looked there but couldn’t find the clubs. When she sued, ONB defended on the basis of the security agreement’s exculpatory clause. Is it valid? If ONB finds the clubs and returns them promptly on her demand, is the bank still guilty of conversion?

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• Issue: Whether the security agreements exculpatory clause is valid?
o Rule: Ford Motor Credit Co. v. Cole. OVERVIEW: Appellant creditor repossessed an automobile from appellee debtor after appellee defaulted upon a loan. Appellee brought suit against appellant, alleging tort liability for the repossession and for conversion of appellee's items within the car. Appellant filed a plea of privilege, which was overruled. Appellant challenged the judgment, contending that venue in another county was proper. The court affirmed, holding that appellee was entitled to maintain suit in the county in which he filed because he brought suit for the value of the articles which were in the automobile at the time it was repossessed under Tex. Stat. art. 1995
o Analysis: No.
o Standard of reasonablesness of creditors conduct.
• Issue: If ONB finds the clubs and returns them promptly on her demand, is the bank still guilty of conversion?
o Same Case as Rule
o Analysis: Yes because she can still recover damages for the time she was deprived of her property.

Front 52

Wonder Spa gave Antitrust National Bank (ANB) a security interest in its accounts receivable and chattel paper in return for a loan. When Wonder Spa missed two payments in a row, ANB notified the spa’s customers that future payments should be made directly to the bank. Does the bank have this right? Read §9-607 and its Official Comment 2; see §9-406(c). If the spa stops opening its doors, need its former customers keep paying ANB? (The spa contracts did not mention the possibility that the contracts would be assigned.)

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• Issue: Whether the bank has the right to receive payments from Wonder Spa’s customers?
o 9-607(a)(1). [Collection and enforcement generally.] If so agreed, and in any event after default, a secured party: (3) may enforce the obligations of an account debtor or other person obligated on collateral and exercise the rights of the debtor with respect to the obligation of the account debtor or other person obligated on collateral to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor or other person obligated on the collateral
o OC №2: 2. Collections: In General. Collateral consisting of rights to payment is not only the most liquid asset of a typical debtor's business but also is property that may be collected without any interruption of the debtor's business This situation is far different from that in which collateral is inventory or equipment, whose removal may bring the business to a halt. Furthermore, problems of valuation and identification, present with collateral that is tangible personal property, frequently are not as serious in the case of rights to payment and other intangible collateral. Consequently, this section, like former Section 9-502, recognizes that financing through assignments of intangibles lacks many of the complexities that arise after default in other types of financing. This section allows the assignee to liquidate collateral 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).
o ANALYSIS: Yes.
o Wonder spa is assignor and ANB is assignee.
o Clients are Account debtors
o 9-607 sets up paramaters what a secured party can do in defaut with respect to enforcement. And end result is in the 400 series which talk about what assignee/ secured party now can do with respect to defenses.
• Issue: If the spa stops opening its doors, need its former customers keep paying ANB?
o 9-404(a)( [Assignee's rights subject to terms, claims, and defenses; exceptions.] Unless an account debtor has made an enforceable agreement not to assert defenses or claims, and subject to subsections (b) through (e), the rights of an assignee are subject to:

(1) all terms of the agreement between the account debtor and assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract; and

(2) any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives a notification of the assignment authenticated by the assignor or the assignee.
o Analysis: Yes, but the right to payment is subject to defenses.
o Clients are account debtors.
o Accounts recievable/account.

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DEFAULT SUMMARY

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1) Repo
a. Judicial
b. Non-Judicial
i. Breach of peace standard.
2) Resale(§9-610)—possibility of deficiency.
a. There are Notice requirements in §9-611
b. Standard for Resale is commercial reasonableness.
i. If it is not then raise issue of fair pricing or market value that was gained as a result.
3) Redemption—option to possibly get it back.
4) Strict forclosure

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PROBLEM 387
When Paul Morphy borrowed $2,000 from the Lasker State Bank in order to finance a trip to Iceland, the bank made him sign an agreement giving the bank a security interest in Paul’s private yacht. He agreed to repay the loan at the rate of $200 a month. He took the trip and on his return made the first payment on time. He failed to make the second payment on the due date, and the next day the bank repossessed the yacht. Paul raced to the bank with the late payment. He had $200 in cash, which he tendered. The bank refused to take the money. The bank’s loan officer, a Mr. Anderssen, pointed to an acceleration clause in the security agreement that made the entire amount due if a payment was missed.

Anderssen demanded the total unpaid balance. Need Paul payoff everything?

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I. Issue: Whether Paul needs to pay off everything?
II. Rule: §9-623(b) & OC 2
a. 9-623(b) [Requirements for redemption.] To redeem collateral, a person shall tender:

(1) fulfillment of all obligations secured by the collateral; and

(2) the reasonable expenses and attorney's fees described in Section 9-615(a)(1).
b. OC 2: 2. Redemption Right. “…To redeem the collateral a person must tender fulfillment of all obligations secured, plus certain expenses. If the entire balance of a secured obligation has been accelerated, it would be necessary to tender the entire balance. A tender of fulfillment obviously means more than a new promise to perform an 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 secured obligations remain, the security interest continues to secure them (i.e., as if there had been no default).”
III. Analysis: Yes. Paul Must pay off everything since there was an acceleration clause.
a. He has redemptive power under §9-623. OC №2 is the secured parties argument. This problem goes a little into state consumer statutes

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PROBLEM 388
Art Auctions, Inc. (AAI) sold Dudley Collector a $5,000 painting by Smock Pallet, a famous artist. Dudley paid $1,000 down and agreed to pay over $1,000 a month thereafter. The finance charge was $151.20; the annual percentage rate was 18 percent. The contract contained a clause saying that in the event of default, AAI could repossess the painting and keep it without reselling it or, at its option, could resell it and sue for the deficiency. Dudley made three more payments and then missed the last one, being temporarily short of funds. AAI, without notice, sent one of its agents to Dudley’s home. Dudley’s teenage son let the agent in, and he simply removed the painting from the wall and walked out, saying, “Thank you.” Dudley immediately tendered $1,000 to AAI and demanded the painting. AAI refused (the painting is now worth $7,000). Four months later Dudley filed suit. What is the basis of his cause of action, and to what relief is he entitled? See §§9-620(e) and (f), 9-625(b) and (c). If Dudley had made only one payment and then defaulted, causing AAI to repossess, could AAI have sent him a proposal that it would keep the painting and forgive half the remaining debt only? See §9-620(g).

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I. Issue: What is the basis of his cause of action, and to what relief is he entitled?

b. Analysis: The basis of his COA is under §9-620(e)(1) and he may recover pursuant to §9-625(c)(2).

II. Issue: If Dudley had made only one payment and then defaulted, causing AAI to repossess, could AAI have sent him a proposal that it would keep the painting and forgive half the remaining debt only?

a. Rule:§9-20(g)
i. (g) [No partial satisfaction in consumer transaction.] In a consumer transaction, a secured party may not accept collateral in partial satisfaction of the obligation it secures.
b. Analysis: No.

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PROBLEM 389
When Repossession Finance Company declared a default and repossessed all the office equipment of attorney Portia Moot, as allowed by the security agreement, the company then did nothing with the collateral except let it sit in a storage room for 17 months. Finally, it conducted a resale with appropriate notices and then sued Portia for the deficiency. She defended by arguing that actions speak louder than words and that, in effect, by doing nothing for such a long period, the finance company had constructively elected strict foreclosure and had forfeited any right to a deficiency. Is this correct? See Official Comment 5 to §9-620.

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I. Issue: Whether the finance company contructivly elected strict forclosure and forfeited any right to definciency?
II. Rule: OC 5 to §9-620
a. 5. Secured Party's Agreement; No "Constructive" Strict Foreclosure. The conditions of subsection (a) relate to actual or implied consent by the debtor and any secondary obligor or holder of a junior security interest or lien. To ensure that the debtor cannot unilaterally cause an acceptance of collateral, subsection (b) provides that compliance with these conditions is necessary but not sufficient to cause an acceptance of collateral. Rather, under subsection (b), acceptance does not occur unless, in addition, the secured party consents to the acceptance in an authenticated record or sends to the debtor a proposal. For this reason, a mere delay in collection or disposition of collateral does not constitute a "constructive" strict foreclosure. Instead, delay is a factor relating to whether the secured party acted in a commercially reasonable manner for purposes of Section 9-607 or 9-610. A debtor's voluntary surrender of collateral to a secured party and the secured party's acceptance of possession of the collateral does not, of itself, necessarily raise an implication that the secured party intends or is proposing to accept the collateral in satisfaction of the secured obligation under this section.
III. Analysis: No.