Business Law and the Legal Environment Study Set 1

Business

Quiz 34 :

Secured Transactions in Personal Property

Quiz 34 :

Secured Transactions in Personal Property

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Benson purchased a new Ford Thunderbird automobile. She traded in her old car and used the Magnavox Employees Credit Union to finance the balance. The credit union took a security interest in the Ford. Subsequently, the Ford was involved in a number of accidents and was taken to a dealer for repairs. Benson was unable to pay for the work done. The dealer claimed a lien on the car for services and materials furnished. The Magnavox Employees Credit Union claimed priority. Which claim had priority? [Magnavox Employees Credit Union v Benson, 331 NE2d 46 (Ind App)]
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Refer to the case Magnavox Employees Credit Union v Benson
Case Issue
The facts to this case are:
• Bank financed debtor's purchase of the car.
• Bank has a security interest in the car.
• Debtor left her car to be repaired.
• Debtor failed to pay bank for car loan and failed to pay repairers for car repair.
The issue is who (bank or repairer) has priority over the claim on the car.
Relevant Terms, Laws, and Cases
Security agreement - is a contract that has a security interest, collateral. For example, a creditor may loan money to the debtor with a property that belongs to the debtor as collateral. The creditor may repossess the collateral if the debtor defaults.
UCC 9-203 - states how security interest is created.
1. A security agreement, e.g. a loan with collateral, is formed. There is sufficient description of the collateral.
2. Value is given
3. Debtor has rights in collateral
Purchase Money Security Interest (PMSI) - security interest based on conditional sale. If the sale was financed by a creditor (can be seller itself, or a third party such as bank), then the creditor would have the PMSI on the sold items as collateral. PMSI do not need to be filed to be perfected. (Note perfected secured creditors have higher priority over other creditors).
Opinion
Court held that the repairer has priority over the car.
The court argued that while the bank would have priority claim over the car. However, since the repairer done work on it during ordinary course of business, this gave the repairer a lien over the payments for his services. This lien takes priority even over perfected security interest. Hence, the repairer has priority claim on the vehicle.

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Under the Secured Transactions Article of the UCC, which of the following security agreements does not need to be in writing to be enforceable? a. A security agreement collateralizing a debt of less than $500. b. A security agreement where the collateral is highly perishable or subject to wide price fluctuations. c. A security agreement where the collateral is in the possession of the secured party. d. A security agreement involving a purchase money security interest.
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Under the Uniform Commercial code, a secured transaction is a loan transaction wherein the lender acquires a security interest in collateral owned by the borrower. The lender is entitled to foreclose or repossess the collateral in the event of the borrower's default.
Under the Secured Transaction Article of the UCC, a security agreement where the collateral is in the possession of the secured party does not need to be in writing to be enforceable.
When a security party takes possession of the collateral as part of the security agreement, the agreement is enforceable without writing.
However, a security agreement that collateral a debt under $500 and where the collateral is in the possession of the secured party or involves purchase money, security interest is in writing.
Hence, the correct response is c).

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Under the Secured Transactions Article of the UCC, which of the following items can usually be excluded from a filed original financing statement? a. The name of the debtor. b. The address of the debtor. c. A description of the collateral. d. The amount of the obligation secured.
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Uniform Commercial Code or UCC's mission is to match the law of sales and other commercial transactions across the US.
Under the Secured transactions Article of the Uniform Commercial Code, the rules governing any transaction other than finance lease couples a debt with a creditor's interest in a debtor's personal property.
Article 9 under UCC applies to consensual and secured transaction in personality. Every consensual secured transaction has five components in it. These are discussed below:
• Debtor
• Secured creditor
• Collateral- It includes the personal property of a debtor that is subjected to a creditor's security interest
• Security agreement
• Security Interest: It basically refers to the creditor's right to a debtor's personal property
In addition, a valid financing statement consists of three elements. These are mentioned below:
• Name and address of the debtor and creditor
• The debtor's signature
• A general description of the collateral property
Hence, the amount of the obligation secured would be excluded from a filed original financing statement.
The correct response is (d).

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Consider the following cases and determine whether the financing statements as filed would be valid under Article 9. Be sure to consider the standard of "seriously misleading" under Revised Article 9. a. In re Thriftway Auto Supply, Inc., 159 BR 948, 22 UCC Rep Serv 2d 605 (WD Okla). The creditor used the debtor's corporate trade name, "Thriftway Auto Stores," not its legal name, "Thriftway Auto Supply, Inc." b. In re Mines Tire Co., Inc., 194 BR 23, 29 UCC2d 617 (Bankr WDNY). The creditor used the name "Mines Company Inc." instead of "Mines Tire Company, Inc." c. Mountain Farm Credit Service, ACA v Purina Mills, Inc., 119 NC App 508, 459 SE2d 75, 27 UCC2d 1441. The creditor filed the financing statement under "Warren Killian and Robert Hetherington dba Grey Daw Farms" in a situation in which the two individuals were partners running Grey Daw Farms as a partnership. d. B.T. Lazarus Co. v Christofides, 104 Ohio App 3d 335, 662 NE2d 41, 29 UCC2d 627. The creditor filed a financing statement in the debtor's old name when, prior to filing, the debtor had changed its name from B.T.L., Inc., to Alma Manufacturing, Inc. e. In re SpecialCare, Inc., 209 BR 13, 34 UCC2d 857 (Bankr ND Ga). The creditor failed to refile an amended financing statement to reflect debtor's name change from "Davidson Therapeutic Services, Inc." to "SpecialCare, Inc." f. Industrial Machinery Equipment Co. Inc. v Lapeer County Bank Trust Co., 213 Mich App 676, 540 NW2d 781, 28 UCC2d 1033. The creditor filed the financing statement under the company's trade name, KMI, Inc., instead of its legal name, Koehler Machine, Inc. g. First Nat'l Bank of Lacon v Strong, 278 Ill App 3d 762, 215 Ill Dec 421, 663 NE2d 432, 29 UCC2d 622. Creditor filed the financing statement using the trade name "Strong Oil Co." instead of the legal name "E. Strong Oil Company."
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McLeod purchased several items from Sears, Roebuck Co. on credit. The description of the items, in which Sears took a purchase money security interest, was as follows: "MITER SAW; LXITVRACDC [a television, videocassette recorder, and compact disc spinner]; 25" UPRIGHT, 28" UPRIGHT [two pieces of luggage]; BRACELET, DIA STUDS, RING; 14K EARR, P, EARRINGS, P [diamond bracelet, ring, and earrings]; and 9-INCH E-Z-LIFT [an outdoor umbrella]." In a dispute over creditors' priorities in McLeod's bankruptcy, one creditor argued that the description of the goods was insufficient to give Sears a security interest. Does the description meet Article 9 standards? [McLeod v Sears, Roebuck Co., 41 UCC2d 302 (Bankr ED Mich)]
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Rawlings purchased a typewriter from Kroll Typewriter Co. for $600. At the time of the purchase, he made an initial payment of $75 and agreed to pay the balance in monthly installments. A security agreement that complied with the UCC was prepared, but no financing statement was ever filed for the transaction. Rawlings, at a time when he still owed a balance on the typewriter and without the consent of Kroll, sold the typewriter to a neighbor. The neighbor, who had no knowledge of the security interest, used the typewriter in her home. Could Kroll repossess the typewriter from the neighbor?
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First Union Bank of Florida loaned money to Dale and Lynn Rix for their purchase of Ann's Hallmark, a Florida corporation. First Union took a security interest in the store's equipment, fixtures, and inventory and filed the financing statement under the names of Dale and Lynn Rix. Subsequently, the Rixes incorporated their newly acquired business as Michelle's Hallmark Cards Gifts, Inc. When Michelle's went into bankruptcy, First Union claimed it had priority as a secured creditor because it had filed its financing statement first. Other creditors said First Union had priority against the Rixes but not against the corporation. Who was correct? What was the correct name for filing the financing statement? [In re Michelle's Hallmark Cards Gifts, Inc., 36 UCC2d 225 (Bankr MD Fla)]
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On October 22, 2001, Benjamin Ritchie executed a promissory note and mortgage in consideration for a $47,000 loan from WaMu. The mortgage covered both real estate located at 1790 Mount Mariah Road, Carlisle, Kentucky, and a manufactured home to be situated on the real property. The mortgage was properly filed in the Nicholas County Clerk's Office on October 31, 2001. Ritchie used the proceeds of the loan to purchase a manufactured home, which was subsequently rendered a total loss as a result of heavy fire damage. As the named loss payee on the insurance policy for the home, WaMu received and released the insurance proceeds to the Debtor to purchase a replacement manufactured home. WaMu failed, however, to record its lien on the certificate of title to the replacement manufactured home. On January 20, 2006, WaMu initiated a foreclosure action on the property. Ritchie raised the defense that WaMu no longer had a valid lien on the manufactured home. Is Ritchie correct? Explain your answer. [ In re Ritchie , 416 B.R. 638 (6th Cir.)]
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On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace's entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace's premises, all future-acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business. Which of the following statements is correct? a. The refrigerators sold to Zone will be subject to Rome's security interest. B) The refrigerators sold to Zone will not be subject to Rome's security interest. C) The security interest does not include the proceeds from the sale of the refrigerators to Zone. D) The security interest may not cover afteracquired property even if the parties agree.
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Kim purchased on credit a $1,000 freezer from Silas Household Appliance Store. After she had paid approximately $700, Kim missed the next monthly installment payment. Silas repossessed the freezer and billed Kim for the balance of the purchase price, $300. Kim claimed that the freezer, now in the possession of Silas, was worth much more than the balance due and requested that Silas sell the freezer to wipe out the balance of the debt and to leave something for her. Silas claimed that because Kim had broken her contract to pay the purchase price, she had no right to say what should be done with the freezer. Was Silas correct? Explain.
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When Johnson Hardware Shop borrowed $20,000 from First Bank, it used its inventory as collateral for the loan. First Bank perfected its security interest by filing a financing statement. The inventory was subsequently damaged by fire, Flanders Insurance paid Johnson Hardware $5,000 for the loss, but First Bank claimed the proceeds of the insurance. Was First Bank correct? Why or why not?
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In 1987, the Muirs bought a motor home. In 1988, the Muirs created and Bank of the West acquired and perfected a security interest in the motor home. In 1992, the Muirs entered into an agreement with Gateleys Fairway Motors by which Gateleys would sell the motor home by consignment. Gateleys sold the motor home to Howard and Ann Schultz. The Schultzes did not know of the consignment arrangement or of the security interest of the bank. Gateleys failed to give the sales money to the Muirs and then filed for bankruptcy. The Schultzes brought suit seeking a declaration that they owned the motor home free of the bank's security interest. The trial court granted the Schultzes summary judgment. Who has title to the motor home and why? [Schultz v Bank of the West, C.B.C., 934 P2d 421 (Ore)]
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Fogel purchased a television set for $900 from Hamilton Appliance. Hamilton took a promissory note signed by Fogel and a security interest for the $800 balance due on the set. It was Hamilton's policy not to file a financing statement until the purchaser defaulted. Fogel obtained a loan of $500 from Reliable Finance, which took and recorded a security interest in the set. A month later, Fogel defaulted on several loans and one of his creditors, Harp, obtained a judgment against Fogel, which was properly recorded. After making several payments, Fogel defaulted on a payment due to Hamilton, who then recorded a financing statement subsequent to Reliable's filing and the entry of the Harp judgment. Subsequently, at a garage sale, Fogel sold the set for $300 to Mobray. Which of the parties has the priority claim to the set? a. Reliable B) Hamilton C) Harp D) Mobray
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Cook sold Martin a new tractor truck for approximately $13,000, with a down payment of approximately $3,000 and the balance to be paid in 30 monthly installments. The sales agreement provided that "on default in any payment, Cook [could] take immediate possession of the property... without notice or demand. For this purpose vendor may enter upon any premises on which the property may be." Martin failed to pay the installments when due, and Cook notified him that the truck would be repossessed. Martin left the tractor truck attached to a loaded trailer and locked on the premises of a company in Memphis. Martin intended to drive to the West Coast with the trailer. When Cook located the tractor truck, no one was around. To disconnect the trailer from the truck (because he had no right to the trailer), Cook removed the wire screen over a ventilator hole by unscrewing it from the outside with his penknife. He next reached through the ventilator hole with a stick and unlocked the door of the tractor truck. He then disconnected the trailer and had the truck towed away. Martin sued Cook for unlawfully repossessing the truck by committing a breach of the peace. Decide. [Martin v Cook, 114 So2d 669 (Miss)]
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A borrowed money from B and orally agreed that B had a security interest in equipment that was standing in A's yard. Nothing was in writing, and no filing of any kind was made. Nine days later, B took possession of the equipment. What kind of interest did B have in the equipment after taking possession of it? [Transport Equipment Co. v Guaranty State Bank, 518 F2d 373 (10th Cir)]
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On March 1, Green went to Easy Car Sales to buy a car. Green spoke to a salesperson and agreed to buy a car that Easy had in its showroom. On March 5, Green made a $500 down payment and signed a security agreement to secure the payment of the balance of the purchase price. On March 10, Green picked up the car. On March 15, Easy filed the security agreement. On what date did Easy's security interest attach? a. March 1 B) March 5 C) March 10 D) March 15
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In 1983, Carpet Contracts owned a commercial lot and building, which it operated as a retail carpet outlet. In April of 1983, Carpet Contracts entered into a credit sales agreement with Young Electric Sign Corp. (Yesco) for the purchase of a large electronic sign for the store. The cost of the sign was $113,000, with a down payment of $25,000 and 60 monthly payments of $2,100 each. In August 1985, Carpet Contracts agreed to sell the property to Interstate. As part of the sale, Carpet Contracts gave Interstate an itemized list showing that $64,522 of the proceeds from the sale would be used to pay for the "Electronic Sign." The property was transferred to Interstate, and the Carpet Contracts store continued to operate there, but now it paid rent to Interstate. In June 1986, Carpet Contracts asked Yesco to renegotiate the terms of the sign contract. Yesco reduced Carpet Contracts' monthly payments and filed a financing statement on the sign at the Utah Division of Corporations and Commercial Code. In December 1986, Interstate agreed to sell the property and the sign to the Webbs, who conducted a title search on the property, which revealed no interest with respect to the electronic sign. Interstate conveyed the property to the Webbs. Carpet Contracts continued its operation but was struggling financially and had not made its payments to Yesco for some time. By 1989, Yesco declared the sign contract in default and contacted the Webbs, demanding the balance due of $26,100. The Webbs then filed suit, claiming Yesco had no priority as a creditor because its financing statement was not filed in the real property records where the Webbs had done their title search before purchasing the land. Was the financing statement filed properly for perfection? [Webb v Interstate Land Corp., 920 P2d 1187 (Utah)]
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Carr Corp. sells VCRs and videotapes to the public. Carr sold and delivered a VCR to Sutter on credit. Sutter executed and delivered to Carr a promissory note for the purchase price and a security agreement covering the VCR. Sutter purchased the VCR for personal use. Carr did not file a financing statement. Is Carr's security interest perfected? a. No, because the VCR was a consumer good. B) No, because Carr failed to file a financing statement C) Yes, because Carr retained ownership of the VCR D) Yes, because it was perfected at the time of attachment
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Lockovich borrowed money from a bank to purchase a motorboat. The bank took a security interest in it but never filed a financing statement. A subsequent default on the loan occurred, and the debtor was declared bankrupt. The bank claimed priority in the boat, alleging that no financing statement had to be filed. Do you agree? Why? [In re Lockovich, 124 BR 660 (Bankr WD Pa)]
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On April 18, 2000, Philip Purkett parked his car, on which he owed $213 in payments, in his garage and locked the garage. Later that night, TWAS, Inc., a vehicle repossession company, broke into the garage and repossessed the car without notice to Purkett. To get the car back, Purkett paid a $140 storage fee and signed a document stating that he would not hold TWAS liable for any damages. Did TWAS and Key Bank violate Article 9 requirements on repossession? [Purkett v Key Bank USA, Inc., 2001 WL 503050, 45 UCC Rep Serv 2d 1201 (ND Ill)]
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