Business Law Study Set 14

Business

Quiz 29 :

Secured Transactions

Quiz 29 :

Secured Transactions

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Priorities Redford is a seller of electric generators. He purchases a large quantity of generators from a manufacturer, Mallon Corp., by making a down payment and signing an agreement to make the balance of payments over a period of time. The agreement gives Mallon Corp. a security interest in the generators and the proceeds. Mallon Corp. properly files a financing statement on its security interest. Redford receives the generators and immediately sells one of them to Garfield on an installment contract, with payment to be made in twelve equal installments. At the time of the sale, Garfield knows of Mallon's security interest. Two months later, Redford goes into default on his payments to Mallon. Discuss Mallon's rights against Garfield in this situation.
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Priorities:
Under the UCC 1-201(37) Mallon has a security interest in the generator it supplied to Redford as a secured party under UCC 9-102(a)(72). The generator is collateral under UCC 9-102(a)(12) and so long as Mallon files has filed its perfected security interest first under UCC 9-322(a)(1) , it will have priority in taking the collateral from Garfield.
If Mallon's and Redford's liens were both perfected, then the first to file or take possession of the collateral has priority under UCC 9-322(a)(1). Under UCC 9-322(a)(3) , the first of unperfected security interests to attach has priority.
An exception that Mallon needs to be aware of is under UCC 9-320(a) , wherein a buyer (Garfield) of goods in the ordinary course of the seller's (Redford) business, the buyer prevails over a secured party's (Mallon) interest, even if perfected and even if the buyer knows of the security interest.

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Suppose that the manufactured home had been affixed to the land and regarded as real property. In that situation, which of the two security interests would have taken priority Why
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Priority of Lien:
In the case of Citizens National Bank of Jessamine County v. Washington Mutual Bank, 309 S.E.3d 792 (2010), the Circuit Court issued a judgment in favor of Washington. The Court of Appeals reversed.
If the mobile had been affixed to the real estate under KRS 186A.297 , it would have converted to real estate, and become subject to the lis pendens that Washington subsequently filed. The mobile home would not have been converted of there were any liens against it at the time of the filing.
Therefore, if the mobile home had been converted to real estate, it would have been subject to Washington's claim.

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SPECIAL CASE ANALYSIS: Security Interests. Go to Extended Case 29.1, Citizens National Bank of Jessamine County v. Washington Mutual Bank , 309 S.W.3d792 (2010), on pages 567-568. Read the excerpt andanswer the following questions. (a) Issue: This case involved conflicting security interests in the same collateral. What was the collateral, and why was it difficult to decide which creditor's security interest took priority (b) Rule of Law: What did the court have to decide before determining which rule governing priorities applied to the conflicting security interests in this case (c) Applying the Rule of Law: The court decided that one party had perfected its security interest in the collateral and the other had not. How did this decision affect the application of the rule of law (d) Conclusion: In which party's favor did the court rule 7 Explain your answer.
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a). Issue:
In the case of Citizens National Bank of Jessamine County v. Washington Mutual Bank, 309 S.E.3d 792 (2010), the Circuit Court issued a judgment in favor of Washington. The Court of Appeals reversed.
The court considered the priority of competing liens and stated that a lis pendens did not disqualify subsequent liens, affect the priority of competing security interests, nor did it apply to real estate; it only applied to real property.
b). Rule of Law:
Under KRS 186A.297 , the owner of the mobile home must affix the home to the real estate for it to be converted to real estate. Otherwise it is considered to be real property, not real estate.
KRS 186A.190 provides that the sole means of perfecting a security interest in personal property for which a certificate of title is issued is by placing a notation of the lien on the certificate of title.
c). Applying the Rule of Law:
The owner of the mobile home did not affix the home to the real estate under KRS 186A.297 , therefore it was real property, not real estate.
Because the property in question was real property and Washington failed to perfect its lien under the mandates of KRS 186A.190 , its claim must give way to Citizens' perfected claim.
d). Conclusion:
The court determined that since Citizens' claim was perfected, it was senior to Washington's claim.

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CASE PROBLEM WITH SAMPLE ANSWER: Purchase-Money Security Interest. In 2007, James Cavazos purchased a new Mercedes vehicle from a dealer and gave JPMorgan Chase Bank (Chase) a purchase-money security interest (PMSI) in the car. The state recorded Chase's lien on the original certificate of title. Cavazos then forged a release of the lien against the title and received a certified copy of the original title. In reliance on that title, NXCESS Motor Cars, Inc., bought the car. It sold the car to Xavier Valeri, who granted a PMSI to U.S. Bank. NXCESS wauanted that the title was free of all liens. When a new title was issued, Chase learned of Cavazos's forgery. It sued Cavazos, Valeri, and U.S. Bank for conversion (see page 127 in Chapter 6). Chase demanded possession of the vehicle and that Cavazos repay the loan. Valeri and U.S. Bank contended that they were buyers in the ordinary course of business and had good title to the Mercedes because the state had provided a title free of liens and claims. Cavazos is liable on the loan, but who has the right to possess the car Which PMSI dominates Explain your answers. [ NXCESS Motor Cars, Inc. v. JPMorgan Chase Bank, N.A., _____ S.W.3d ____ (Tex.App.- Houston 2010)]
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A QUESTION OF ETHICS: Priorities. In 1995, Mark Denton cosigned a $101,250 loan issued by the First Interstate Bank (FIB) in Missoula, Montana, to Denton's friend Eric Anderson. Denton's business assets-a mini-warehouse operation-secured the loan. On his own, Anderson obtained a $260,000 U.S. Small Business Administration (SBA) loan from FIB at the same time. The purpose of both loans was to buy logging equipment so that Anderson could start a business. In 1997, the business failed. As a consequence, FIB repossessed and sold the eqiãpment and applied the proceeds to the SBA loan. FIB then asked Denton to pay the other loan's outstanding balance ($98,460), pirn interest. When Denton refused , FIB initiated proceedings to obtain his business assets. Denton filed a suit in a Montana state court against FIB, claiming, in part., that Anderson's equipment was the collateral for the loan that FIB was attempting to collect from Denton. [ "Denton v. First Interstate Bank of Commerce, 2006 MT 193, 333 Mont. 169,142 P.3d 797 (2006)] (a) Denton's assets served as the security for Anderson's loan because Anderson had nothing to offer. When the loan was obtained, Dean Gillmore, FIB's loan officer, explained to them that if Anderson defaulted, the proceeds from the sale of the logging equipment would be applied to the SBA loan first. Under these circumstances, is it fair to hold Denton liable for the unpaid balance of Anderson's loan Why or why not (b) Denton argued that the loan contract was unconscionable and constituted a "contract of adhesion." What makes a contract unconscionable Did the transaction between the parties in this case qualify What is a "contract of adhesion" Was this deal unenforceable on that basis Explain.
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QUESTION WITH SAMPLE ANSWER: The Scope of a Security Interest. Edward owned a retail sporting goods shop. A new ski resort was being constructed in his area, and to take advantage of the potential business, Edward decided to expand his operations. He borrowed a large sum from his bank, which took a security interest in his present inventory and any after-acquired inventory as collateral for the loan. The bank properly perfected the security interest by filing a financing statement. Edward's business was profitable, so he doubled his inventory. A year later, just a few months after the ski resort had opened, an avalanche destroyed the ski slope and lodge. Edward's business consequently took a turn for the worse, and he defaulted on his debt to the bank. The bank then sought possession of his entire inventory, even though the inventory was now twice as large as it had been when the loan was made. Edward claimed that the bank had rights to only half of his inventory. Is Edward correct Explain.
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Default Primesouth Bank issued a loan to Okefenokee Aircraft, Inc. (OAI), to buy a plane. OAI executed a note in favor of Primesouth in the amount of $161,306.25 plus interest. The plane secured the note. When OAI defaulted, Primesouth repossessed the plane. Instead of disposing of the collateral and seeking a deficiency judgment, however, the bank retained possession of the plane and filed a suit in a Georgia state court against OAI to enforce the note. OAI did not deny that it had defaulted on the note or dispute the amount due. Instead, OAI argued that Primesouth Bank was not acting in a commercially reasonable manner. According to OAI, the creditor must sell the collateral and apply the proceeds against the debt. What is a secured creditor's obligation in these circumstances Can the creditor retain the collateral and seek a judgment for the amount of the underlying debt, or is a sale required Discuss. [ Okefenokee Aircraft, Inc. v. Primesouth Bank , 296 Ga.App. 782, 676 S.E.2d 394 (2009)]
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Security Interest In St. Louis, Missouri, in August 2000, Richard Miller orally agreed to loan Jeff Miller $35,000 in exchange for a security interest in a 1999 Kodiak dump truck. The Millers did not put anything in writing concerning the loan, its repayment terms, or Richard's security interest or rights in the truck. Jeff used the amount of the loan to buy the truck, which he kept in his possession. In June 2004, Jeff filed a petition to obtain a discharge of his debts in bankruptcy. Richard claimed that he had a security interest in the truck and thus was entitled to any proceeds from its sale. What are a creditor's main concerns on a debtor's default How does a creditor satisfy these concerns What are the requirements for a creditor to have an enforceable security interest Have these requirements been met in this case Considering these points, what is the court likely to rule with respect to Richard's claim [ In re Miller , 320 Bankr. 911 (E.D.Mo. 2005)]
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According to the court, which of the two security interests in the land on which the manufactured home was situated had priority Why
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VIDEO QUESTION: Secured Transactions. Go to this text's Web site at www.cengage.com/blaw/clarkson and select "Chapter 29." Click on "Video Questions" and view the video titled Secured Transactions. Then answer the following questions. (a) This chapter lists three requirements for creating a security interest. In the video, which requirement does Laura assert has not been met (b) What, if anything, must the bank have done to perfect its interest in the editing equipment (c) If the bank exercises its self-help remedy to repossess Onyx's editing equipment, does Laura have any chance of getting it back Explain. (d) Assume that the bank had a perfected security interest and repossessed the editing equipment. Also assume that the purchase price (and the loan amount) for the equipment was $100,000, of which Onyx had paid $65,000. Discuss the rights and duties of the bank with regard to the collateral in this situation.
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Perfection of a Security Interest Marsh has a prize horse named Arabian Knight. Marsh is in need of working capital. She borrows $50,000 from Mendez, who takes possession of Arabian Knight as security for the loan. No written agreement is signed. Discuss whether, in the absence of a written agreement, Mendez has a securityinterest in Arabian Knight. If Mendez does have a security interest, is it a perfected security interest
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Creating a Security Interest In 2002, Michael Sabol, doing business in the recording industry as Sound Farm Productions, applied to Morton Community Bank in Bloomington, Illinois, for a $58,000 loan to expand his business. Besides the loan application, Sabol signed a promissory note that referred to the bank's rights in "any collateral." Sabol also signed a letter that stated, "the undersigned does hereby authorize Morton Community Bank to execute, file and record all financing statements, amendments, termination statements and all other statements authorized by Article 9 of the Illinois Uniform Commercial Code, as to any security interest." Sabol did not sign any other documents, including the financing statement, which contained a description of the collateral. Less than three years later, without having repaid the loan, Sabol filed a petition in a federal bankruptcy court to declare bankruptcy. The bank claimed a security interest in Sabol's sound equipment. What are the elements of an enforceable security interest What are the requirements of each of those elements Does the bank have a valid security interest in this case Explain. [ In re Sabol , 337 Bankr. 195 (C.D.III. 2006)]
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