SECURED TRANSACTIONS
Fall Semester 2015
PROBLEM SET 5
Perfection of a Security Interest
Perfection by Filing and the Operation of the UCC Filing System
Carefully read the following:
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Chapters 4, 5.01, 5.02, 5.03, 5.04, 5.05, 9.01, 9.02, and 9.03, and § 16.04[B][1] of
UNDERSTANDING SECURED TRANSACTIONS
§§ 9-108, 9-201, 9-301, 9-303, 9-307, 9-308, 9-309, 9-310, 9-311, 9-317, 9-501, 9-502, 9503, 9-504, 9-506, 9-509, 9-510, 9-515, 9-516, 9-517, 9-520, 9-521, and Bankruptcy Code
§ 544
1.
You arrived at work this morning, looking forward to a quiet day, and found an e-mail waiting from
Bubba Charles over at Putnam County Bank:
One of our borrowers, Gary Myers, owes us $500,000. Myers borrowed the money two years
ago, and signed a security agreement granting us a security interest in two motorcycles (a Honda
Valkyrie and a Ducati Monster 1200) and an Andy Warhol painting of Ho Chi Minh. We filed a
financing statement covering both bikes and the painting.
Last month, Myers missed a payment on the loan and wouldn’t return my phone calls to inquire
about the situation. So I sent the repo guy out to get the bikes and the painting (which was only
display at a nearby art museum). The repo guy took possession of the Ducati and the Warhol
painting, but reported back that Myers had sold the Valkyrie to his neighbor Mitchell. Earlier this
morning, I got a call from Myers’s lawyer claiming that the Bank doesn’t have a perfected security
interest in any of the collateral and thus can’t sell it, and he demanded that we either return the
Ducati and the Warhol or Myers will file for bankruptcy? Is he right that we’re unperfected?
Could we still sell the bike anyway, or do we have to give it back? What about the painting? And
what if Myers filed for bankruptcy? Also, can we repossess the Valkyrie from Mitchell, or is that
just gone at this point? Give me some instructions.
How do you reply?
2.
You are going over the paperwork for a loan that First Bank proposes to make to Royce-Rolls
Motors, Inc., an automobile dealership owned by Royce Barondes. The dealership has two locations, one
in East St. Louis, IL and another in St. Louis, MO. First Bank would extend Royce-Rolls Motors a $5
million line of credit, and would take a security interest in all presently-owned and after-acquired vehicles
at both locations. On the cover of the file, Sara Jones (the loan officer at First Bank) attached a note asking
you, “How would we go about perfecting First Bank’s security interest in all of those vehicles?” How would
you respond? What questions (if any) would you have for Sara?
3.
During lunch, you decide to watch a CLE webcast about the operation of the Article 9 filing system.
One of the speakers offered a powerpoint slide that provided the following “Four Steps to Assure
Perfection and Priority.” The slide provided a checklist in the following order: “(1) Check the UCC
records to be sure that there are no UCC-1 filings on record against your prospective debtor that cover
the same collateral you’re planning to take. (2) If the search comes up clean (i.e., there are no prior filings),
then file your UCC-1 covering the collateral. (3) Then have the debtor sign the security agreement, if
debtor hasn’t done so already. (4) At that point, it’s safe for you to disburse the loan proceeds with the
absolute assurance you’ll have first priority.”
Based on your reading and your review of the applicable provisions governing the operation of the UCC
filing system, do you see any problems with this advice? If so, what are they?
4.
After lunch, you get an e-mail message from Bubba Charles at Putnam County Bank:
We’ve been asked to extend a $100,000 line of credit to Billiards on Broadway, a local bar,
restaurant, and pool hall in Columbia. It will be secured by all of the inventory and equipment of
the business, including after-acquired. Can you look over the paperwork before it is finalized?
The e-mail attachment contains a security agreement and financing statement that identifies the Debtor as
“Billiards on Broadway,” and that lists the debtor’s address as 514 E. Broadway, Columbia, MO 65201.
Both the security agreement and the financing statement identify the collateral as “all of the Debtor’s
inventory and equipment, including after-acquired.”
Do you see any problems with Bubba’s paperwork? Using the search tools on the Missouri Secretary of
State’s website, http://www.sos.mo.gov/, can you figure out what changes to the paperwork (if any) are
needed?
[Note: You can search the general corporate records on the Secretary of State’s website without having
to create an account. If you want to search the UCC Article 9 records on the site, you have to create an
account and password, but there is no cost to create an account or to do online searches, so I’d encourage
you to do so for the sake of seeing how the filing system is structured.]
5.
Later in the day, you get a call from Joe Smith at Neighborly Finance. He tells you that one of
Neighborly Finance’s borrowers, Charley Graham, has filed for bankruptcy. Neighborly Finance had
taken a security interest in Charley’s plumbing tools to secure a business loan it made to Charley. Joe says
to you:
When I got the bankruptcy notice, I pulled out the file and looked at it, and I have a bad feeling.
The security agreement uses the name “Charley Graham,” which is the name he uses. The financing
statement was supposed to use the name “Charles B. Graham,” which is the name on his driver’s
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license. The financing statement used the name “Charley Graham” instead. Are we perfected, or
not?
What do you tell Joe? What additional information would you need, if any, to advise Joe fully and
accurately?
6.
Some UCC filing offices set up their computerized systems using search logic that returns only exact
matches. Others have systems that use the search logic found in the IACA Model Administrative Rules.
[The IACA is the International Association of Commercial Administrators. It is the professional association
for government administrators of business organization and secured transaction record systems at the state,
provincial, territorial, and national level.] The search logic in those rules:
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does not distinguish upper and lower case letters
disregards punctuation marks and accents
ignores words such as “corporation,” “corp.,” “inc.,” “LLC,” “limited” or other terms that indicate
the existence or nature of an organization
ignores the word “the” at the beginning of a name
ignores spaces
treats an initial as the equivalent of a first or middle name beginning with that letter, and
treats no middle name as the equivalent of all middle names
You’ve just been hired by the new Secretary of State to run the UCC filing system for your state. Which
search logic would you use — exact matches only, or the IACA model rules — and why?
7.
Just before getting ready to leave for the day, you get an e-mail from Kelly Smith, who works for
Putnam County Bank:
I’ve just started working for the Bank, handling all of the loans where the borrower has filed for
bankruptcy. This afternoon, the Bank got served with 6 complaints from Daniel Hart, who is a
Chapter 7 trustee in the local bankruptcy court. Each complaint involves a different Chapter 7
debtor that owes the Bank money. Hart is the bankruptcy trustee for each of the debtors. The
Bank took collateral for each loan, but Hart is arguing that Bank’s security interest in each case is
unperfected and thus can be set aside under Bankruptcy Code § 544(a).
I’ve attached a copy of the UCC-1 financing statement for each of these loans. On Loan #1, for
which the debtor is ABC, Inc., Hart claims that the Bank’s security interest is unperfected because
the Bank’s UCC-1 filing didn’t provide an address for the Bank. On Loan #2 (debtor is Joseph
Louis Thompson), Hart claims that the Bank’s security interest is unperfected because the debtor’s
address is incorrect. On Loan #3 (debtor is Jones Accounting Service), Hart claims the Bank’s
security interest is unperfected because the UCC-1 didn’t provide a sufficient description of the
collateral — Bank’s security agreement covered after-acquired equipment and accounts, but the
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collateral description in the Bank’s UCC-1 just said “equipment and accounts,” not “equipment
and accounts, including after-acquired”).
On Loans #4, 5, and 6, Hart is also arguing that the collateral descriptions are insufficient. On
Loan #4 (debtor is Agora Food Services), Bank took a security interest in the restaurant
equipment and furniture at a local restaurant located at 251 First Avenue, but the UCC-1
description references the debtor’s equipment and furniture at 2001 Broadway (which is the
debtor’s business office, not a restaurant). On Loan #5 (debtor is XYZ Services), Bank took a
security interest in a particular computer system, and Hart is claiming the description is not sufficient
to cover the computer (the description in the financing statement is “all of the Debtor’s assets”). On
Loan #6 (debtor is Emma’s Clothing, Inc.), Bank has a security interest in “all of the debtor’s
equipment, inventory, and accounts, including after acquired,” but the Bank’s financing statement
doesn’t have any collateral description — the box for the collateral description is empty, and
obviously filed the financing statement didn’t catch the mistake.
Can you look at these and give me a call to let me know if we have a problem in any of these
cases?
In which of these cases, if any, can Hart avoid the Bank’s security interest, and why?
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