SECURED TRANSACTIONS
Fall 2015
PROBLEM SET 14
Financing of Intangibles and Indispensable Paper (Notes, Chattel Paper)
Priority of Competing Interests (Secured Parties and Buyers)
Carefully read the following:
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§§ 1.06, 3.04, 10.03[D], 10.05, 11.03[C], and 11.03[D] of UNDERSTANDING SECURED
TRANSACTIONS
§§ 9-324, 9-330, 9-331, 9-403, 9-404, 9-406
1.
Your day starts with an e-mail from Dan Arthur at Atlantic Commercial Finance:
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We have this hotshot 22-year old, straight out of business school, as a new account
representative. He has a proposed new client, one of his college buddies who wants to
start a new catering business called Plate Lunch. The business would cater lunches to
law firms, banks, accounting firms, and other businesses in the downtown area for lunch
meetings. Approved customers would be billed and have 30 days to pay. Hotshot wants
ACF to buy Plate Lunch’s accounts for 90% of the face amount, and then notify the
customers to pay their bills directly to ACF.
I suggested that sounded like we’d be financing Plate Lunch’s accounts, but he said “No,
we’re not loaning them anything. We’re just buying their accounts for cash. If we
collect an account in full, we keep the extra 10%. Of course, if someone didn’t pay, that
would be our loss, but his customers are going to be law firms, banks, and government
offices, so there’s not a substantial risk of nonpayment. We could always refuse to buy
the accounts of any sketchy customers. And since we’re not loaning them anything, we
don’t have to worry about Article 9 or the Article 9 filing system.”
This all sounds pretty dubious to me. Is he correct?
What’s your response?
2.
Mid-morning, as you’re opening the mail, you get a curious letter from a gentleman
named Vincent Bonebreaker. The pertinent part of the letter reads as follows:
I have taken an assignment of all of the accounts of the law firm of Dewey, Cheatum &
Howe. According to my records, BankGroup owes Dewey, Cheatum & Howe a total of
$25,000 in legal fees, which is currently due and payable. You are hereby instructed to
pay that amount to me immediately.
Dewey, Cheatum & Howe (DCH) is a law firm that BankGroup hired to represent First Bank in
a litigation matter. DCH billed First Bank a total of $25,000 for its representation (which
resulted in a summary judgment against First Bank).
3.
a)
You have a check, payable to DCH in the amount of $25,000, that is sitting on
your desk waiting to be mailed, as the bill will become past due later this week.
What do you do?
b)
For purposes of this subquestion, you call Mr. Bonebreaker and tell him that (1)
BankGroup does not intend to pay the bill because DCH’s representation was
incompetent and (2) BankGroup has already filed a grievance against DCH with
the State Bar based on DCH’s incompetent and unethical work. Bonebreaker
responds that this information is irrelevant; the account has been assigned to him
and he has notified BankGroup, so BankGroup is obligated to pay him regardless.
Is Mr. Bonebreaker correct?
Just before lunch, you hear from Sara Jones at First Bank:
I have a problem related to one of our borrowers, Stan’s Farm Implement Co., which is a
local farm implement dealer. We have a security interest in all of Stan’s present and
after-acquired inventory, chattel paper, and accounts, perfected by a filed financing
statement that dates back to 2011.
In January 2015, Stan’s became a John Deere dealer. All of Stan’s Deere-branded
inventory is financed through John Deere Acceptance Corp. (JDAC), John Deere’s
financing subsidiary. Before that relationship was established, JDAC filed a financing
statement covering Deere-branded inventory, and they sent us a letter in December 2014
indicating that JDAC would be financing all of Stan’s Deere-branded inventory.
As of today, Stan’s is in default to both us and JDAC. I don’t have any question about
the inventory in the store; we’ve got priority as to the non-Deere stuff, and JDAC will
have priority as to the Deere stuff. I’m clear on that.
My question is about two Deere tractors that were sold within the last month. One was
sold to Dennis Crouch. Based on Crouch’s credit, which is a bit shaky, Crouch signed an
installment sale contract (at a high rate of interest) under which Stan’s retained title to the
tractor until Crouch paid all installments. In turn, this contract was assigned to JDAC.
The other tractor was sold to Bob Perry; based on Perry’s good credit, Stan’s agreed to
sell the Deere to him “90 days same as cash.”
My question is whether we have priority to the payments due from Crouch and from
Perry, or whether JDAC does. Can you get back to me as soon as possible with an
answer? I don’t want to contact Crouch or Perry and make demands for payment if we’re
not in a position to claim priority over Deere.
What’s your response? What additional information, if any, do you need to know?
4.
When you return from lunch, you have a voice mail message from Joe Smith at
Neighborly Finance:
We’re getting ready to open a small office over in Mocksville. There’s a new furniture
and applicance store in Mocksville, Easy Ed’s Home Store, Inc. They sell a lot of
furniture and appliances on installment sale contracts, and they want to finance their
operations by selling those contracts to us. It would be a standard notification
arrangement; we would buy the contracts and notify the customers to begin paying us
directly. We still have to iron out with Easy Ed’s how credit risk will be allocated or
shared when customers default.
Here’s my question. This is going to be a really small office, and we don’t want to have
to physically take and hold the contracts themselves. We have a digital copy of each
contract, if we need to look at it, and we can get the information we need to service the
contracts from the digital copy. Is there any way we can prevent Easy Ed’s from doublecrossing us and improperly “double-selling” the contracts without taking physical
possession of the contracts? If we file a financing statement that covers “chattel paper”
and that says “chattel paper covered by this financing statement cannot be assigned with
the prior written consent of Neighborly Finance,” will that do the trick?
What’s your response? What additional information, if any, do you need?