SECURED TRANSACTIONS
Fall 2015
PROBLEM SET 10
Priority Disputes: Secured Party vs. Secured Party
Carefully read the following:
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§§ 10.01, 10.02, 10.03[A], and 10.04 of UNDERSTANDING SECURED TRANSACTIONS
§§ 9-103, 9-104, 9-210, 9-322, 9-323, 9-324, 9-327, 9-339, 9-401, 9-513
1.
First Bank is considering extending a $200,000 line of credit to Pants, Inc., a local clothing
store, to be secured by all of the inventory and accounts of the store (including after-acquired). First
Bank’s loan officer on this loan is Bart Smith. He sent you an e-mail that says:
I did a quick UCC search and discovered that there was a UCC-1 on file against their
inventory in favor of Wells Fargo Bank. The president of Pants (a customer of our bank) told
me he still owed them $25,000 from what they’d advanced him last year when he expanded
the store. He then patched into the call his contact at Wells Fargo Bank; the Wells Fargo guy
confirmed that they were owed $25,000, and told me he’d put it in writing if I asked him to
provide a written confirmation under § 9-210.
Pants has $200,000 of inventory on hand already, so there’s plenty of equity in the inventory.
We should be safe even if we’d technically be in second position behind Wells Fargo, since
they’re only owed $25,000. Any reason we shouldn’t go ahead and make the deal?
What’s your response? What additional information, if any, do you need?
2.
Later in the morning, Bart Smith calls you about another loan:
I have a problem involving one of my borrowers, Mitchell Building, Inc. They’re a local
construction company, a good outfit. We’ve got a security interest in all of their equipment,
including after-acquired, that we took back in 2011. We filed a proper financing statement
at the time, and it was all good.
The problem is that in May 2015, Mitchell Building, Inc. bought an earthmover from another
local contractor, Crouch Contracting, that was going out of business. Mitchell has been
using the earthmover since then, but it just got a demand letter from Second Bank, saying
that Crouch had granted Second Bank a security interest in the earthmover back in
November 2013. The letter included a copy of the security agreement, which did cover the
earthmover. And a UCC record search shows that Second Bank did file a financing statement
in November 2013.
I think we’re still OK, since our financing statement goes back to 2011, so our UCC-1 was
on file first and thus I think we’d still have first priority. Still, this situation seems a bit off,
so I thought I should run it by you.
What’s your response? What additional information, if any, do you need to advise Bart fully?
3.
After lunch, you get a call from Sandra Black, a First Bank Vice-President:
We have a problem with one of our borrowers, McCann Contracting, Inc., which is a general
contractor on commercial construction projects. They have a line of credit with us that has
fluctuated between $1 million and $2 million, and we have a security interest (perfected by
filing) against all of McCann’s equipment, inventory, accounts, and payment intangibles,
including after-acquired. This filing goes back to 2010.
Recently, McCann suffered serious cash flow problems due to two jobs on which they didn’t
get paid because of construction-related disputes. They also lost out on several potential
new contracts and, as a result, they’ve gone into default. We’re willing to work with them
for awhile, but now we have a potential problem with another creditor claiming priority as
to two pieces of equipment and threatening to repossess them.
Two years ago, McCann decided to purchase a bulldozer. At the time, McCann was maxed
out on its line of credit from us, so McCann went to Regions Bank. On October 1, 2012,
Regions loaned McCann $80,000 to purchase the bulldozer. The next day, McCann paid for
the bulldozer and took possession of it. On October 3, McCann signed a security agreement
describing the bulldozer as collateral (it was identified by model and serial number), and on
October 20, 2012, Regions filed a financing statement covering the bulldozer.
The second piece of equipment is a generator used by McCann to provide light for evening
work on projects. McCann acquired this generator in January 2013, but in an odd way.
McCann was waffling on whether to buy the generator, so the manufacturer (Industrial
Power Solutions, or IPS) agreed to let McCann try the generator out for 30 days, at no
charge, with no obligation to McCann. McCann took possession of the generator on January
10, 2013, and after three weeks, decided it wanted to keep the generator, so on January 31,
2013, McCann borrowed the $70,000 purchase price from Regions (which paid IPS directly)
and signed a security agreement granting Regions a security interest in the generator (the
agreement adequately described the generator). Regions filed a financing statement covering
the generator on February 15, 2013.
McCann is in default to Regions, too, and Regions is threatening to repossess the bulldozer
and the generator. If they are repossessed, it would effectively prevent McCann from
completing its current jobs and would pretty much shut McCann down for good. We’d like
to give McCann another 30-60 days because we think they’re on the cusp of getting their
other financial issues resolved, so we’d like to prevent Regions from repossessing the
bulldozer and the generator if we can do so legally. Do we have any basis for that?
How will you respond? What additional information, if any, do you need?
4.
An hour later, Sandra Black calls you back and says:
There’s another complication in the McCann situation. There’s about $25,000 worth of
lumber and building materials that McCann has sitting on one of its current job sites.
McCann acquired those materials from Koch Building Supply, which claims to have taken
a purchase money security interest in those supplies. The lawyer for Koch says that McCann
is in default and is threatening to repossess the materials unless McCann pays for them in
cash before the end of the day. I asked the lawyer for Koch to send me his proof. He sent
me a copy of a security agreement covering the materials, and a financing statement (filed
the same day as the security agreement) covering the materials. This was the first we’d ever
heard of Koch. Do they have better rights in the materials than we do?
What’s your response? What additional information, if any, do you need?