Business Law Today Study Set 1

Business

Quiz 22 :

Security Interests in Personal Property

Quiz 22 :

Security Interests in Personal Property

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Pledge. On April 14, 1992, David and Myrna Grossman borrowed $10,000 from Brookfield Bank in Brookfield, Connecticut, and signed a note to repay the principal with interest. As collateral, the Grossmans gave the bank possession of stock certificates representing 123 shares in General Electric Co. The note was nonnegotiable and thus was not subject to Article 3 of the Uniform Commercial Code. On May 8, the bank closed its doors. The Grossmans did not make any payments on the note and refused to permit the sale, of the stock to apply against the debt.-The Grossman? note, and collateral were assigned to Premier Capital, Inc., which filed a suit in a Connecticut state court against them, seeking to collect the principal and interest due. The Grossman responded, in part, that they were entitled to credit for the value of the stock that secured the note. By the time of the trial, the stock certificates had been lost. Should a creditor have a duty to preserve collateral that is transferred into the creditor's possession as security for a loan? How should the court rule, and why? [Premier Capital, Inc. v. Grossman, 68 Conn.App. 51, 789 A 2d 565 (2002)]
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The court would rule in favour of Mr G.
The security interest held by Bank B was lost when it has lost the possession of the collateral. It was the duty of the creditor to keep the possession in safety and preserve the stock certificates. They were non-negotiable in nature and hence its loss would make their perfected interest void.

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Video. Question. Go to this text's Web site at vwrathomsonedu.com/westhuslaw/blt and select "Chapter 22r Click on "Video Questions" and view the video titled Secured Transactions. Then answer the following. questions. 1. This, chapter lists three requirements for creating a security interest. In the video, which requirement does Laura assert has not been met? 2. What, if anything, must the bank have done to perfect its interest in the editing equipment? 3. If the bank exercises its self-help remedy to repossess Onyx's editing equipment, does Laura have any chance of getting it back? Explain. 4. 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 has paid $65,000. Discuss the rights and duties of the bank with regard k the collateral in this situation.
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1.The assertion made in the video centers on the requirement that collateral possessed by a secured party must be possessed in accordance to an agreement or pursuant to a written security agreement that describes the collateral. Uniform Commercial Code 9-108(c) requires that the collateral should be described and identified.
As per the case, the lending papers did not identify that the property was held as collateral. However, there was another document that made reference to the subject property.
2.To perfect a security interest, Uniform Commercial Code 9-301, 9-310(a), 9-313(a) requires to record property financing statements with the Clerk of Courts and keeper of county records. This is required to put third party creditors on notice of the debtor/creditor status.
3.Collateral can be redeemed after repossession. As per Uniform Commercial Code, satisfaction of debt redemption needs to be occurred before selling the collateral. Reasonable expenses and attorneys' fees that are incurred by the creditor to repossess the equipment can also be received.
4.According to Uniform Commercial Code 9-610, the bank can sell, lease or dispose of the collateral in any commercially reasonable manner. Section 9-620 of the Uniform Commercial Code allows secured parties to take and receive collateral in satisfaction, if the debtor consents to an acceptance.
As per the case, the party might not agree to the creditor's retention of the goods. Court's approval needs to be sought to sell the goods.

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A Question of Ethics: Priorities. img 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 equipment and applied the proceeds to the SBA loan. FIB then asked Denton to pay the other loan's outstanding balance ($98,460), plus 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)] (See page 586.) (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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Yes , Mr D would still be liable to make payment for the unpaid debt as his name was signed in the contract and his assets were perfected as security interest for the bank. It was given as collateral to the bank and hence he is liable to make pay.

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Case Problem with Sample Answer. When a customer opens a credit-card account with Sears, Roebuck Co., the customer fills out an application and sends it to Sears for review; if the application is approved, the customer receives a Sears card. The application contains a security agreement, a copy of which is also sent with the card. When a customer buys an item using the card, the customer signs a sales receipt that describes the merchandise and contains language granting Scars a purchase-money security interest (PMSI) in the merchandise. Dayna Corny bought a variety of consumer goods from Sears on her card. When she did not make payments on her account, Sears filed a suit against her in an Illinois state court to repossess the goods. Corny filed for bankruptcy and was granted a discharge. Sears then filed for bankruptcy and was granted a discharge. Sears then filed a suit against her to obtain possession of the goods through its PMSI, but it could not find Conry'S credit-card application to offer into evidence. Is a signed Sears sales receipt sufficient proof of its security interest? In whose favor should the court rule? Explain. [Sean, Roebuck, Co. v. Corny, 321 111.App.3d 997, 748 N.E.2d 1248 (3 Dist. 2001)]
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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. (See page 584.)
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Critical Legal Thinking. Review the three requirements for an enforceable security interest. Why is each of these requirements necessary?
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What rights does a secured creditor have on the debtor's default?
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Priorities. PC Contractors, Inc., was an excavating business in Kansas City, Missouri. Union Bank made loans to PC, subject to a perfected security interest in its equipment and other assets, including "after-acquired property." In late 1997, PC leased heavy construction equipment from Dean Machinery Co. The lease agreements required monthly payments, which PC often made late or missed. After eighteen months, Dean demanded that PC either return the equipment or buy it. While attempting to obtain financing for the purchase, PC continued to make monthly payments. In November 2000, Dean, which had not filed a financing statement to cover the transaction, demanded full payment of the amount due. Before paying the price, PC went out of business and surrendered its assets to Union, which pre-pared to sell them. Dean filed a suit in a Missouri state court against Union to recover the equipment, claiming, in part, that-the bank's security interest had not attached to the equipment because PC had not paid for it. In whose favor should the court rule, and why? [Dean Machinery Co. v. Union Bank, 106 S.W.3d 510 (Mo.App.W.D. 2003)]
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What is the most common method of perfecting a security interest under Article 9?
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Financing Statement. In 1994, SouthTrust Bank, N.A., loaned money to Environmental Aspecs, Inc. (EM), and its subsidiary, EAI of NC. SouthTrust perfected its security interest by filing financing statements that listed only EAI as the debtor, described only EAI's assets as collateral, and were signed only on EAFs behalf. SouthTrust believed that both companies were operating as a single business represented by EAI. In 1996, EM of NC borrowed almost $300,000 from Advanced Analytics Laboratories, Inc. (AAL). AAL filed financing statements that listed the assets of EAI of NC as collateral but identified the debtor as EM. The statements referred, however, to attached copies of the security agreements, which were signed by the president of EM of NC and identified the debtor as EM of NC. One year later, EAI and EAU of NC renegotiated their loan with SouthTrust, and the bank filed financing statements listing both companies as debtors. In 1998, EAI and EAI of NC filed for bankruptcy. One of the issues was the priority of the security interests of South] 'rust and AAL. AAL contended that its failure to identify EAI of NC as the debtor on its financing statements did not give SouthTrust priority. Is AAL correct? Why or why not? [In re Environmental Aspecs, Inc., 235 Bankr. 378 (E.D.N.C., Raleigh Div. 1999)]
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Security Interests in Personal Property 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 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 installment sales contracts. 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. 1. 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? 2. 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? 3. Which of these purchases would qualify as a PMSI in consumer goods? 4. 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?
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Creating a Security Internet 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." Sabot 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.I11. 2006)]
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. If two secured parties have perfected security interests in the collateral of the debtor, which party has priority to the collateral on the debtor's default?
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What three requirements must be met to create an enforceable security interest?
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The following multiple-choke question is representative of the types of questions available in one of the four sections of ThomsonNOW for Business Law Today. ThomsonNOW also provides feedback for each response option, whether correct or intoned, and refers to the location within the chapter where the correct answer can be found. Perfection is the legal process by which secured parties protect
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Priority Disputes. 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 pay the balance 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 purchaser Garfield in this situation.
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Question with Sample Answer-Perfection. Marsh has a prize horse named Arabian Knight. In need of working capital, Marsh borrows $5,000 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 security interest in Arabian Knight. If Mendez does have a security interest, is it a perfected security interest? Explain.
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Security Interest In St. Louis, Missouri, in August 2000, Richard Miller orally agreed to loan Jeff Miller S35,000 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? Are these requirements 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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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What is a security interest? Who is a secured party? What is a security agreement? What is a financing statement?
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