SECURED TRANSACTIONS
Fall 2015
Prof. Freyermuth
PROBLEM SET 16
Maintaining Perfection and Priority: Post-Transaction Changes II
(Sale of Collateral; Changes in Use of Collateral; Name Changes;
Changes in the Debtor’s Organizational Structure)
Carefully read the following:
•
•
§§ 5.03[C], 8.02, and 9.03 of UNDERSTANDING SECURED TRANSACTIONS
§§ 9-303, 9-307, 9-315, 9-337, 9-506, 9-507, and 9-508
1.
Your day begins with an e-mail from Bubba Charles at Putnam County Bank:
Two years ago, we made a loan to Sarah Jones, who had just graduated from law school and was
opening her own firm. We took a security interest in all of her equipment and office furnishings,
and filed a proper financing statement. Yesterday, I learned that Sarah Jones had gotten an offer
to join a big firm in the city and had sold all of the collateral to her classmate, Andrew Smith, who
was going to take over her practice. Smith has an account with us, so when I called him to ask if
he knew about our security interest, he acknowledged that he did, and that he had planned to take
over making Jones’s payments and finish paying off the loan. We know Smith pretty well, so we’re
comfortable with him using the collateral and taking over the payments on the loan. I’ve prepared
a new UCC-1 filing and wanted to run it by you before filing it.
You review the attachment to the e-mail, and find it is a standard UCC-1 filing that identifies the collateral
properly and identifies the debtor as “Andrew Smith” (which is the name on Smith’s current drivers’
license). Does Bubba have to file it? Is there any reason not to do so?
2.
While you are pondering your response to Bubba, the phone rings:
This is Sara Jones at First Bank. From time to time, we buy auto installment sale contracts from
Columbus Car Classics (CCC), a local used auto dealer for whom we also provide inventory
financing. A few months ago, CCC sold a used Bentley to Bowman, who signed an installment
contract under which CCC retained a security interest in the car. CCC obtained a title certificate
that showed its lien. A month later, First Bank purchased the contract. CCC sent us the title
certificate and we notified Bowman to begin making his payments to First Bank. Do I need to
apply to the DMV to have them issue a new title certificate that shows that the lien is now held by
First Bank, rather than CCC? I’d rather save the filing fees and just hold onto the existing title
certificate, as long as that’s good enough to protect us.
What’s your response to Sara?
3.
Just before lunch, you get another call from Sara Jones, who is frantic:
I have a problem with a CCC deal. Last year, we bought several contracts from CCC; one of
them was a contract under which Barondes had purchased a used Ferrari. Again, CCC had its lien
properly noted on the title certificate, which they sent to us when we bought the contract. We
notified Barondes and he had been paying us like clockwork until last month. We waited until the
beginning of this month and, again, he didn’t pay. Today I discover that he had sold the car to
Henson and that Henson had then gone to the Department of Revenue and bribed the clerk to issue
a “clean” title certificate for the car. I immediately called our repo guy and told him to go repossess
the car from Henson, but it is locked in Henson’s garage, and Henson is arguing that he has clear
title to the car based on the clean title certificate. Can that be right? Are we still safe with a
perfected security interest based on the title certificate we’re holding? If not, what do I do?
What’s your advice?
4.
At the gym, you run into Dan Brown from Atlantic Commercial Finance (ACF). He begins
describing a transaction in which ACF is providing inventory financing for a local retailer, Farm Pride Lawn
& Garden. ACF had a security interest in “all of the Debtor’s present and after-acquired inventory,”
properly perfected by a financing statement covering “inventory.” Dan then says:
Here’s my problem. The owner of Farm Pride is a guy named Doug Abrams. He took a $9,000
riding mower home and is using it as his personal lawn mower. He hasn’t missed any payments
on the loan, but I’m worried that he might argue that the tractor is no longer inventory and thus isn’t
our collateral anymore. Is that a risk? Should we file a financing statement indicating that he’s now
using the mower for personal purposes? If he tried to sell the mower to one of his neighbors, we
would still be able to enforce our security interest in it?
What’s your advice?
5.
After lunch, you get a call from Kelly Smith at Putnam County Bank:
I have a question about a loan we made three years ago to Fred Farmer. We took a security
interest in all of his present and after-acquired farm equipment, and filed a financing statement to
perfect it. Now it appears that in January of 2014, Fred Farmer changed his name to James Davis.
Turns out, he had discovered that he had been adopted by the Farmers, who named him Fred.
After making contact with his birth mother, whose name was Davis, and who had originally named
him James, he decided to start using his original name.
We didn’t find out about it until last week, when we got a notice that James Davis had filed for
bankruptcy. When I started investigating further, we learned that James Davis was Farmer’s new
name.
There are 20 different pieces of equipment in which we claim a security interest. Most of them go
back to 2011 when we made the loan. There are three tractors, though, that he bought
subsequently: one in November 2014, one in February 2015, and the third in August 2015. The
bankruptcy trustee is arguing that because we never amended our financing statement to reflect
Farmer’s name change, our security interest in all of the equipment is unperfected. Is that right?
What’s your response? What additional information, if any, do you need?
6.
Before you can get out of the office at the end of the day, you get another call. Sensing it can’t be
good news, you think about letting the call go to voice mail, but pick it up anyway:
It’s Bubba at Putnam County Bank. Last year, we extended a $150,000 line of credit to Tanya
Turner, who started a business selling cookies, cakes, pies, and other baked treats. She has both
walk-in customers (who pay cash) and she does a lot of catering to local businesses (to whom she
sells on account). She operated the business under the name Tanya’s Treats, but it wasn’t anything
other than her operating under a trade name. We took a security interest in all of her inventory,
equipment, and accounts, including after-acquired, and we filed a financing statements under her
individual name and her trade name.
We got a payment yesterday of $10,000 toward that line of credit. The check was from “Tanya’s
Treats, LLC.” That got the attention of our payment staff, who called me. Turns out that sometime
in June or July, Tanya went to a local lawyer who organized her business as an LLC. There hasn’t
been any day-to-day change in her operations — she’s still using the same trade name — other
than that she’s now organized the business as an LLC.
She didn’t have our permission to do this, but I don’t think I care as long as she keeps paying. We
don’t have anything to worry about, do we?
What’s your response to Bubba? What additional information, if any, do you need?