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Quiz 29 :

Creditors Rights and Remedies

Quiz 29 :

Creditors Rights and Remedies

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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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Perfection of a Security Interest:
Under the UCC Section 9 there is creation of the security interest under which Edward is supposed to grant security interest in his property to represent loan collateral. Therefore he is a security interest holder and has an entitlement to the property not qualified under the bank's loan.
However, because Edward failed to submit to what governed the contract of loan repayment he gave the bank the right to possess the property in order to ensure that the underlying obligation was satisfied.
Hence the bank will prevail because it held a properly perfected security interest in Edward's entire inventory. Edward's entire inventory was given as collateral and regardless of the current size and value it is subject to the collateral given for the loan.

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Paul Barton owned a small property-management company, doing business as Brighton Homes. In October, Barton went on a spending spree. First, he bought a Bose surround-sound system for his home from KDM Electronics. The next day, he purchased a Wilderness Systems kayak and roof rack from Outdoor Outfitters, and the day after that he bought a new Toyota 4-Runner financed through Bridgeport Auto. Two weeks later, Barton purchased six new iMac computers for his office, also from KDM Electronics. Barton bought each of these items under an installment sales contract. Six months later, Barton's property-management business was failing, and he could not make the payments due on any of these purchases and thus defaulted on the loans. Using the information presented in the chapter, answer the following questions. Suppose that after KDM Electronics repossesses the surround-sound system, it decides to keep the system rather than sell it. Can KDM do this under Article 9? Why or why not? DEBATE THIS: A financing statement that does not have the debtor's exact name should still be effective because creditors should always be protected when debtors default.
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Repossession of collateral
Repossession basically refers to ascertaining the collateral asset if the debtor makes default on the payment. Thus the lender forecloses the loan by repossession of the asset. In other words it is an act practiced by the financial institution which involves taking back the asset which is being used as collateral under the loan agreement.
Thus in this case K electronics decided to repossess the surround system and retain the same. As per UCC 9-620(a) secured party can repossessed or retain the collateral security if it consists of consumer goods on which the debtor has not made payment of 60 percent or more of the purchase price in a PMSI. However if the payment of more than 60 percent is made by the debtor the secured party must sell or otherwise dispose of the repossessed collateral.
Since B has not made payment of 60 percent or more of the purchase price Hence K electronics is entitle keep the surround-sound system and retain the same.

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Paul Barton owned a small property-management company, doing business as Brighton Homes. In October, Barton went on a spending spree. First, he bought a Bose surround-sound system for his home from KDM Electronics. The next day, he purchased a Wilderness Systems kayak and roof rack from Outdoor Outfitters, and the day after that he bought a new Toyota 4-Runner financed through Bridgeport Auto. Two weeks later, Barton purchased six new iMac computers for his office, also from KDM Electronics. Barton bought each of these items under an installment sales contract. Six months later, Barton's property-management business was failing, and he could not make the payments due on any of these purchases and thus defaulted on the loans. Using the information presented in the chapter, answer the following questions. For which of Barton's purchases (the surround-sound system, the kayak, the 4-Runner, and the six iMacs) would the creditor need to file a financing statement to perfect its security interest? DEBATE THIS: A financing statement that does not have the debtor's exact name should still be effective because creditors should always be protected when debtors default.
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Perfection of security interest
UCC 9-503(A)(3) states that financing statement must disclose organization name or the individual name of the debtor. Thus organization name involves association such as churches, clubs, general partnership and joint ventures. However if there is no organization name available individual names must be listed.
In this case, B purchased kayak, surround sound system, IMac computers and Toyota 4 runner in installment sales contract. However the creditor is not required to file financing statement pertaining to perfection by attachment. Thus it involves perfection of security interest as consumer goods pertaining to Purchase money security interest bought for family, personal and household purpose as security interest of the secured party is automatically perfected.
Since IMac computer are being purchased for the office. Hence it is ascertained that for IMac computer the creditor is required to file financing statement as it does not comes under PMSI consumer goods.

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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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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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Paul Barton owned a small property-management company, doing business as Brighton Homes. In October, Barton went on a spending spree. First, he bought a Bose surround-sound system for his home from KDM Electronics. The next day, he purchased a Wilderness Systems kayak and roof rack from Outdoor Outfitters, and the day after that he bought a new Toyota 4-Runner financed through Bridgeport Auto. Two weeks later, Barton purchased six new iMac computers for his office, also from KDM Electronics. Barton bought each of these items under an installment sales contract. Six months later, Barton's property-management business was failing, and he could not make the payments due on any of these purchases and thus defaulted on the loans. Using the information presented in the chapter, answer the following questions. Suppose that Barton's contract for the office computers mentioned only the name Brighton Homes. What would be the consequences if KDM Electronics filed a financing statement that listed only Brighton Homes as the debtor's name? DEBATE THIS: A financing statement that does not have the debtor's exact name should still be effective because creditors should always be protected when debtors default.
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Paul Barton owned a small property-management company, doing business as Brighton Homes. In October, Barton went on a spending spree. First, he bought a Bose surround-sound system for his home from KDM Electronics. The next day, he purchased a Wilderness Systems kayak and roof rack from Outdoor Outfitters, and the day after that he bought a new Toyota 4-Runner financed through Bridgeport Auto. Two weeks later, Barton purchased six new iMac computers for his office, also from KDM Electronics. Barton bought each of these items under an installment sales contract. Six months later, Barton's property-management business was failing, and he could not make the payments due on any of these purchases and thus defaulted on the loans. Using the information presented in the chapter, answer the following questions. Which of these purchases would qualify as a PMSI in consumer goods? DEBATE THIS: A financing statement that does not have the debtor's exact name should still be effective because creditors should always be protected when debtors default.
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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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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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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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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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Disposition of Collateral PRA Aviation, LLC, borrowed $3 million from Center Capital Corp. to buy a Gates Learjet 55B. Center perfected a security interest in the plane. PRA defaulted on the loan less than two years later and surrendered the jet. Center hired Business Air International, an aircraft broker, to sell it. Business Air reviewed the market, design, and mechanical condition of similar aircraft to arrive at a value estimate of $1.45 million. Business Air marketed the jet in trade publications, on the Internet, and by direct advertising to select customers for $1.59 million. There were three offers. The high bid was $1.35 million subject to an inspection. Center offered $1.3 million for a "cash deal, as is, where is, kick the tires, start the engines" deal. The buyer agreed. Center filed a suit in a federal district court against PRA to collect the deficiency. PRA argued that the jet should have sold for $2.4 million to $2.9 million, considering the asking prices for newer aircraft. Was the sale commercially reasonable? Explain. [Center Capital Corp. v. PRA Aviation, LLC, __ F.Supp.2d __ (E.D.Pa. 2011)]
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To watch this chapter's video, Secured Transactions, go to www.cengagebrain.com and register your access code that came with your new book or log in to your existing account. Select the link for the "Business Law Digital Video Library Online Access" or "Business Law CourseMate." Click on "Complete Video List," view Video 33, and 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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