SECURED TRANSACTIONS
Fall 2015
PROBLEM SET 11
Priority: Secured Party vs. Buyer of Goods
Carefully read the following:
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§§ 11.01, 11.02, 11.03[A], 11.03[B], 12.01, 12.02, 12.03, and 14.03 of UNDERSTANDING
SECURED TRANSACTIONS
§§ 1-201(b)(9), 2-403, 9-210, 9-315, 9-317, 9-320, 9-321, and 9-323
1.
Just as you settle in to read the Wall Street Journal, into your office walks someone you’ve
never seen before. Before you can call building security, he introduces himself as Dale Burnside,
the head of HR for BankGroup. He tells you:
I have a big farm south of town, and two weeks ago, I bought a large tractor with a 20-foot
reel mower attachment so that I can keep the fields cut. I bought it from a guy named Chuck
Henson. I saw it advertised in the paper for a price of $6,000. I went to see it; it was in good
shape, so I paid him, took it home, and started using it. This morning, I got a call from a
lady at Commerce Bank who claims that Henson had granted them a security interest in the
tractor, that he owed them $8,500, and that if I didn’t pay it by noon tomorrow or surrender
possession of the tractor, they’d sue me for that amount. I had no idea Commerce Bank had
a security interest in the tractor, and Henson sure as hell didn’t tell me anything about it. I
don’t have to pay them, do I?
What advice would you give him? What additional information, if any, would you want to know?
2.
Thirty minutes later, you get a call from another complete stranger. This time, it is Mira
Gervino, who is the building administrator for BankGroup’s headquarters, where your office is
located. Mira tells you the following story:
I’m in charge of building operations, which includes furnishings. On behalf of BankGroup,
last month I ordered 12 new suites of office furniture from College Furniture, Inc., a local
retailer. The president of College Furniture owed us $25,000 from a prior loan, and so we
agreed to take the furniture in satisfaction of that debt.
This morning, I got a letter from Hawthorn Bank, which said “We have a properly perfected
security interest in all of the inventory of College Furniture, Inc., which is in default and
owes us a total balance of $150,000. We know that you purchased furniture recently from
College Furniture. This furniture remains subject to our security interest, and thus you are
hereby directed to either pay us a total of $150,000 immediately, or to surrender the furniture
to us.” I’m pretty sure I can just ignore this, but thought I should check with your office
first.
What’s your response to Mira? What additional information do you need?
3.
You have a lunch meeting scheduled with Lisa Shreves, who is the President of BankGroup
Industrial Credit (BIC). BIC, another BankGroup subsidiary, is in the business of providing
financing to large companies. For example, one of BIC’s primary borrowers is Northeast Airlines,
which has a $450 million line of credit with BIC, secured by a security interest in Northeast’s fleet
of aircraft. [Assume this security interest is properly perfected. Note that security interests in
aircraft are perfected by filings with the Federal Aviation Adminstration, which maintains a registry
for interests in aircraft, not by UCC-1 filings.]
At lunch, Shreves indicates:
I’ve recently learned some disconcerting information about how our employees have been
handling the Northeast Airlines line of credit. It turns out that after any airplane in
Northeast’s fleet reaches a total of 40,000 hours in flight, Northeast sells the plane to a thirdworld airline and replaces it with a new plane. Northeast has had this policy for about 18
months now; during that time, they’ve sold off at least 30 planes, 25 of them to
Turkmenistan Airlines. In none of the cases did Northeast have our express written consent
to do this, but in none of the cases did our folks object. It isn’t clear exactly what our folks
knew, but our policy is where the collateral is as valuable as a plane, our loan officer is
supposed to verify and inspect each item of collateral every four months.
Do we still have a valid security interest in the planes sold to Turkmenistan Airlines?
What’s your response? What additional information, if any, do you need?
4.
Later that day, Shreves calls you back:
Digging around this afternoon, I found out more information. In one recent case, Northeast
agreed to sell a used MD-80 to Turkmenistan Airlines for a price of $3.1 million. It turns
out that one of our people was told about the proposed sale, and expressly authorized it, but
only on the condition that Northeast had to turn over $2.5 million of the sale proceeds for
application to Northeast’s credit line. But Northeast didn’t tell Turkmenistan Airlines that,
and when Turkmenistan Airlines paid the purchase price, Northeast didn’t apply any of the
proceeds toward their line of credit. Can we assert our security interest against the plane,
or are we stuck because Turkmenistan Airlines didn’t know anything about the condition?
What’s your response? What additional information, if any, do you need?
5.
By 4:00 p.m., you realized that you hadn’t heard from Bubba Charles the entire day. You
decide to leave to have a drink to celebrate your good fortune, but before you can escape the office,
the phone rings:
It’s Bubba. A year ago, Putnam County Bank made a $10,000 loan to Tim Haines, Jr., who
goes by “Junior,” to enable him to purchase a new tractor, and took a security interest in the
tractor. We didn’t file a financing statement because in the security agreement, he warranted
that he was acquiring the tractor for personal, family, or household purposes, giving us a
PMSI in consumer goods.
I didn’t want to make this loan at the time, but Junior’s father, Tim Haines, Sr., is a
classmate and best friend of the Bank president. Junior is a moron; he talks about how he’s
an “organic farmer,” but I’m pretty sure all he’s “producing” is weed and meth.
Junior has now missed three straight payments on the loan, so we went to repossess the
tractor, but it wasn’t on his farm. Fortunately, I had never trusted the guy, so I had
surreptitiously put a GPS tracking device on the tractor when he bought it. So I was able to
find the tractor, three counties away, in the hands of a guy named Tony Anthony. Anthony
said he had bought the tractor from a local retailer, Marvin’s Farm Implement Co. Marvin’s
confirmed this; they said that they had purchased the tractor from Junior two months ago for
a price of $4,000, and then Marvin’s resold the tractor to Anthony a week later for $5,000.
Both Anthony and Marvin’s say they didn’t know that Putnam County Bank claimed any
interest in the tractor, and they’re probably telling the truth — Junior’s a lying scumbag in
addition to a moron, so he wouldn’t have told Marvin’s the truth himself.
Can I send out our repo guy to get the tractor from Anthony?
What’s your response to Bubba? What additional information, if any, do you need?
6.
Suppose that in Problem 5, Bubba had instead learned that Junior had simply sold the tractor
directly to Anthony for $4,000 in cash. Would this change your advice? Why or why not?
7.
Just as you were putting on your coat to leave for dinner, the phone rings. You make the
mistake of answering it:
Sara Jones at First Bank. I’ve got a situation with one of our borrowers, Draco Engineering.
They have a line of credit with us, secured by all of their present and after-acquired
equipment, inventory, software, and accounts. Two months ago, without our consent, they
sold three computers, complete with engineering software, to Stan Smith, a new engineer
looking to start his own firm. This transaction violated Draco’s security agreement with us,
and we didn’t know about it or give our consent.
At the time it happened, the balance on Draco’s line of credit was $5,000. Today, the
balance on the line of credit is $30,000. I contacted Stan Smith to demand that he turn over
the computers and the software unless he pays us their fair market value (roughly $20,000).
He called Draco and discovered that the balance on the credit line at the time of his purchase
was only $5,000, and so he says he won’t pay any more than that. Can you advise what
steps I should take next?
What’s your response? What additional information, if any, do you need to advise Sara fully?