SECURED TRANSACTIONS
Fall Semester 2015
PROBLEM SET 23
Lease and Bailment Transactions
Carefully read the following:
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§ 1.03 of UNDERSTANDING SECURED TRANSACTIONS
§§ 1-201(b)(35), 1-203, 9-109, 9-505
1.
Last month, while visiting your parents, your mother gave you an entire bolt of charcoal grey
wool that she had bought before she lost interest in sewing. You decided to take it to your local
tailor, Taylor the Tailor, to have some new suits made for yourself. You dropped it off, had yourself
measured for the suits, and went on about your business; the suits were to be ready in 2-3 weeks.
But when you called yesterday to check on how the suits were coming, the phone line at Taylor the
Tailor had been disconnected. Further investigation revealed that Taylor the Tailor had shut down
its operations. Even worse, it turns out that Second Bank had taken possession of all of the assets
of Taylor the Tailor pursuant to its security agreement with Taylor the Tailor; the repossessed items
include one of your finished suits and the remaining fabric. When you called Second Bank to
demand that they return the suit and the remaining fabric, Second Bank refused. You never filed
a UCC-1 financing statement covering the fabric. What are your rights, and why?
2.
Four months ago, you received a Cadillac stretch limousine from your grandfather’s estate.
The car was not your style, but your younger brother (just graduated from high school and
unmotivated to attend college) wanted to start a limousine service. Unfortunately, he had no assets.
Thus, you agreed to lease the Cadillac to him for a six-month term, agreeing to allow him to pay you
rent based on a percentage of the jobs that he gets. You had an understanding with him that at the
end of six months, the two of you would evaluate the likely success of his business and at that point
you would determine whether to enter into a new lease or explore potential terms on which he might
buy the Cadillac.
After four months, the business was a spectacular failure (your brother was completely unreliable
and thus managed no repeat business). When you went to pick up the limousine, your brother
informed you that it had been seized two weeks ago by the sheriff and sold at a sheriff’s sale to ABC
Limo (a local limo company). What are your rights versus ABC Limo? What additional
information (if any) do you need?
3.
Your college classmate Steve Smith calls you from out of the blue:
I own a local car dealership. With the bad economy, I end up repossessing a lot of vehicles,
and Article 9’s sale procedures are tricky to comply with, so I want restructure all of my auto
contracts as “Leases.” A customer will make the same monthly payment that he/she would
have made on a “sale” transaction, and if the customer make all of his/her payments on time,
the customer has the option to buy the car for an “option fee” of $25. This way, if a
customer defaults, I can repossess the car, put it right back on the lot, and “re-lease” it to a
new customer, all without having to comply with Article 9.
Is he right? Why or why not?
4.
This year, you didn’t receive a bonus from BankGroup. As a result, you don’t have the
money you were counting on to buy that new 120-inch flat-screen TV to watch college basketball
and House of Cards.
Thus, you go to Aaron’s (the home of “Tiger John” Cleek) and sign a “rent-to-own” contract for a
120-inch flat-screen HDTV. Under the contract, you agree to pay $149 for rent for a month. At the
end of each month, you can return the TV with no further liability, or you can keep it for another
month for an additional $149. If you keep the TV for 24 consecutive months (and make 24
consecutive payments of $149), you will become the owner of the TV without any further payments.
(a)
Must Aaron’s file a financing statement to protect itself against your other creditors?
What additional information, if any, would be relevant?
(b)
Would this rent-to-own contract ever constitute a “security agreement” as defined
in Article 9? Why or why not?