QUESTION NO.
3
JULY, 2007
OREGON BAR
EXAMINATION
Moose started a portable sawmilling business. He borrowed $100,000 from
Darius to purchase a portable sawmill and truck. Moose signed a promissory note
for the loan and also signed a security agreement in favor of Darius that described
as collateral the portable sawmill, truck, and “all equipment, inventory, and other
personal property.” Darius mailed a financing statement to the Department of
Forestry. The financing statement contained Moose’s and Darius’s names and
addresses and a description of the collateral identical to the description in the
security agreement. Both Moose and Darius signed and dated the financing
statement.
Moose received cash for his services and also accumulated a valuable
inventory of milled lumber from the jobs. Soon after Moose started his business,
Moose bought a mountain bike from BikeKing for $2,500. BikeKing advanced
Moose credit to purchase the bike. Moose signed a promissory note for the loan and
also signed a security agreement in favor of BikeKing that specifically identified the
bike Moose purchased from BikeKing.
Shortly thereafter, Moose defaulted on the loans from Darius and BikeKing.
Darius wrote a letter to Moose demanding payment. Because Moose was unable to
pay, he offered Darius his equipment to satisfy the debt. Darius took the portable
sawmill, the truck, the BikeKing mountain bike, and one-half of Moose’s lumber
inventory. A BikeKing representative subsequently demanded payment from
Moose, who explained he had nothing left for BikeKing to take. The BikeKing
representative, knowing that the remaining lumber inventory in Moose’s shop was
worth $2,500, took the lumber over Moose’s objections. The representative later
went to Darius’s house and noticed the BikeKing bike parked by the front curb.
After a failed attempt to locate Darius to negotiate distribution of Moose’s property,
the BikeKing representative loaded the bike into her truck and drove away.
Applying the Uniform Commercial Code:
40%
1.
Discuss whether Darius attached and perfected his security
interest in the following items:
(a) portable sawmill;
(b) equipment; (c) inventory; and (d) personal property.
10%
2.
Assuming Darius attached the truck, discuss whether Darius
perfected his security interest in the truck.
25%
3.
Assuming both Darius and BikeKing perfected their respective
security interests in Moose’s bike, discuss whose interest
would have priority.
25%
4.
Discuss whether BikeKing lawfully took possession of Moose’s
lumber and the bike.
July, 2007, Oregon Bar Examination
Question No. 3 - Issue Outline and
Answer That Addresses All Issues
Page 1 of 8
JULY, 2007, OREGON
BAR EXAMINATION
QUESTION NO. 3
UNIFORM COMMERCIAL CODE IX
SECURED TRANSACTIONS
Issue Outline
40%
Discuss whether Darius attached and perfected his security
interest in the portable sawmill, equipment, inventory and
personal property.
A.
Attachment – Attachment describes the process by which the
security interest is created in the property of the debtor in favor
of the secured party.
a. Discussion of Attachment
i. A security interest is an interest in personal property
or fixtures that secures payment or performance of an
obligation. [1-201(37)].
ii. A security agreement is an agreement that creates or
provides for a security interest. [9-102(a)(73)].
iii. A security agreement attaches to the collateral when it
becomes enforceable against the debtor with respect to
the collateral. [9-203(a)].
b. A security interest attaches and is enforceable against a
debtor if the following criteria are met:
i. Debtor authenticated security agreement;
ii. Security agreement had clear description of the
collateral that reasonably identifies the collateral;
iii. Value given; and
iv. Debtor has rights in the collateral or power to transfer
those rights.
c. Analysis
i. Moose authenticated (by signing) a security
agreement. The security agreement had a reasonably
clear description of the portable sawmill and truck,
July, 2007, Oregon Bar Examination
Question No. 3 - Issue Outline and
Answer That Addresses All Issues
Page 2 of 8
Darius gave value for this collateral and it appears
that Moose had rights in the collateral.
ii. The description of the collateral involving all
equipment and personal property is supergeneric.
Because a security agreement must advise the secured
party and the debtor as to what property is specifically
covered, supergeneric terms such as “all” are not
sufficient. [9-108(c)]. Moose’s equipment and personal
property are likely not attached through this security
agreement.
iii. It is likely however, that Moose’s inventory, including
his after-acquired inventory of milled lumber is
attached. The term “inventory” implies that it covers
both present inventory and after-acquired inventory,
and “inventory” is a sufficiently descriptive term.
B.
Perfection – Perfection is the process that the parties must go
through to make sure that the creditor’s security interest in the
collateral is good against most of the rest of the world.
Attachment of a security interest is a predicate to perfection of
that security interest.
a. Methods of Perfection
i. Filing a financing statement;
1. Name and address of the debtor;
2. Name and address of the secured party; and
3. Description of the collateral.
ii. Possession of collateral;
iii. Control over collateral; or
iv. Automatic perfection.
b. Where to file financing statement -- Default rule in UCC is
that the statement should be filed in one central state office.
In most states it is the office of the Secretary of State.
c. Analysis
i. The financing statement was properly filled out with
names and addresses of the debtor and secured party.
ii. The description of collateral, including the
supergeneric descriptions would also be sufficient for a
financing statement
July, 2007, Oregon Bar Examination
Question No. 3 - Issue Outline and
Answer That Addresses All Issues
Page 3 of 8
iii. While the most common location for filing a financing
statement is with the office of the Secretary of State in
most states, it is possible there are other locations for
certain kinds of secured interests. If the Department
of Forestry was an appropriate location for filing, then
Darius’s security interest is perfected with respect to
the portable sawmill and inventory.
iv. Even if the Department of Forestry was an
appropriate filing location, the described collateral
involving all equipment and personal property cannot
be perfected because that property was never properly
attached.
v. If the financing statement was not filed with the
appropriate agency, then the security interest is not
perfected.
10%
Assuming Darius attached the truck, discuss whether Darius
perfected his security interest in the truck.
A.
25%
Perfection
a. Financing statement is neither required nor effective to
perfect a security interest in a motor vehicle.
b. To perfect a security interest in the truck, the certificate of
title must show Darius as lienholder identifying the
existence of his security interest in the truck.
c. Under these facts there is no indication the parties ensured
the motor vehicle title identified Darius as a lienholder, thus
his security interest is not perfected.
Assuming both Darius and BikeKing perfected their respective
security interests in Moose’s bike, discuss who would have a
priority interest over the bike Moose purchased.
A.
Generally—Priority among perfected creditors
First to File or Perfect. Priority goes to whichever secured party
is the first either to file or perfect the security interest
(whichever is earlier), provided there is no period thereafter
July, 2007, Oregon Bar Examination
Question No. 3 - Issue Outline and
Answer That Addresses All Issues
Page 4 of 8
when there is neither filing nor perfection [U.C.C . 9-322(a)(1)].
This rule gives the party who files first priority even over those
creditors who may have perfected first.
B.
25%
Purchase Money Security Interests.
a. Purchase Money Security Interest (PMSI)
i. PMSI arises when the secured party advances money
or credit to enable the debtor to purchase the collateral
[U.C.C. 9-103]. A PMSI interest in collateral generally
has priority over other secured interests that are not
PMSI.
ii. Moose used the loan from Darius to purchase a
sawmill and truck and for which Darius attempted to
hold a secured interest. There is no evidence that
Moose used the money from this loan to purchase the
bike. Darius would not have a PMSI in the bike.
iii. BikeKing sold Moose a “consumer good” and extended
credit to Moose to purchase the bike. BikeKing has a
PMSI and because the bike was a “consumer good” it is
automatically perfected and would have “superpriority”.
b. BikeKing has “super-priority” with respect to the BikeKing
bike only, and its secured interest takes priority over that of
Darius’s interest.
Discuss whether BikeKing lawfully took possession of Moose’s
lumber and the bike in front of Darius’s home.
A.
General Rule of Default – Unless otherwise agreed, a secured
party has the right to take possession of collateral on default
under the note or security agreement terms.
B.
Repossession Rule – Was there a breach of the peace when
repossessing the collateral?
a. In taking possession of the lumber in Moose’s shop, BikeKing
did so over Moose’s objections. This arguably was a breach of
July, 2007, Oregon Bar Examination
Question No. 3 - Issue Outline and
Answer That Addresses All Issues
Page 5 of 8
the peace. Moreover, BikeKing had no secured interest in
the lumber and it was therefore unlawful.
b. BikeKing has a “super-priority” security interest in the bike.
Arguably, because BikeKing did not commit trespass to
repossess the bike, there was no breach of peace.
ANSWER THAT ADDRESSES ALL ISSUES
CALL #1
Attachment and perfection
This is a UCC Article 9 issues involving security agreements for
personal property, the secured interests therein and priority of secured
parties over other secured parties. A security interest is defined as an
interest in personal property or fixtures that secures payment or performance
of an obligation. A security agreement is defined as an agreement that
creates or proves a security interest. A security agreement attaches to
collateral when it becomes enforceable against the debtor with respect to the
collateral.
Attachment describes the process by which the security interest is
created in the property of the debtor in favor of the secured party.
Attachment is established if the following criteria are met: 1) the debtor
authenticates the security agreement; 2) the security agreement had a clear
description of the collateral that reasonably identifies the collateral; 3) value
is given; and 4) the debtor has rights in the collateral or power to transfer
those rights. Moose authenticated, by signing, the security agreement. The
security agreement had a reasonably clear description of the portable sawmill
and truck, Darius gave value for this collateral, and it appears that Moose
had rights in the collateral. The portable sawmill and truck were properly
attached.
The description of the collateral in the security agreement involving all
equipment and personal property is supergeneric. Because a security
agreement must advise the secured party and the debtor as to what property
is specifically covered, supergeneric terms such as “all” generally are
insufficient to provide a reasonable description of the collateral. Thus
Moose’s equipment and personal property are likely not attached through
this security agreement.
July, 2007, Oregon Bar Examination
Question No. 3 - Issue Outline and
Answer That Addresses All Issues
Page 6 of 8
It is likely, however, that Moose’s inventory, including his afteracquired inventory of milled lumber is attached. The term “inventory”
implies coverage both of present inventory and after-acquired inventory.
Thus the term “inventory” is a sufficiently descriptive term, and would attach
Moose’s inventory, including his after-acquired inventory.
Perfection is the process that parties must go through to make sure
that the creditor’s security interest in the collateral is good against most of
the rest of the world. Attachment of a security interest as described above is
a necessary predicate to perfection of that security interest. Perfection can be
achieved in the following ways: 1) filing a financial statement; 2) possession
of collateral; 3) control over collateral; or 4) automatic perfection. In this
matter, perfection of the various collateral was attempted by filing a financial
statement and automatic perfection.
A financing statement requires the name and address of the debtor,
the name and address of the secured party, and the description of the
collateral. The financing statement must be filed. The default rule in the
UCC is that the financing statement should be filed in a central state office.
In most states the central filing location is with the office of the Secretary of
State.
The financing statement in this case was properly completed with the
names and addresses of the debtor and secured party. The description of the
collateral does not need to be as specific as the description of collateral in a
security agreement. Thus even the supergeneric terms would likely be
sufficient for the purposes of the financing statement.
While the most common location in most states for filing a financing
statement is with the office of the Secretary of State, there could be other
locations for filing a financing statement for specific kinds of personal
property. If the Department of Forestry was an appropriate location for filing
the financing statement with respect to the portable sawmill and inventory,
then Darius’s security interest is perfected with respect to that property. But
because the equipment and personal property referenced in the security
agreement were not properly attached, that property cannot be perfected. If
the financing statement was not filed with the appropriate state office, then
the security interest is not perfected.
July, 2007, Oregon Bar Examination
Question No. 3 - Issue Outline and
Answer That Addresses All Issues
Page 7 of 8
CALL #2 Perfection of the truck
A financing statement is neither required nor effective to perfect a
security interest in a motor vehicle. To perfect a security interest in the
truck, the certificate of title must show Darius as lien holder and note the
existence of his security interest in the truck. Under these facts there is no
indication the parties ensured the truck title identified Darius as a lien
holder. His security interest in the truck is not perfected.
CALL #3 Priority over the mountain bike
Generally, priority among perfected secured creditors goes to the one
who first filed or perfected the security interest, whichever is earlier. This
rule gives the party who files first priority even over those who may have
perfected first.
In this case both Darius and BikeKing have Purchase Money Security
Interests (PMSI) in various collateral. PMSI occurs when the secured party
advances money or credit to enable the debtor to purchase the collateral. A
secured creditor with a PMSI in collateral would have priority over other
secured creditors without a PMSI in that same collateral. Here, Moose used
the loan from Darius to purchase a sawmill and truck and for which Darius
attempted to hold a secured interest. Assuming that Darius has a perfected
interest in the bike, there is no evidence, however, that Moose used the
money from this loan to purchase the bike. Darius would not have a PMSI in
the bike.
BikeKing, on the other hand, sold Moose a “consumer good” and
extended credit to Moose to purchase the bike. BikeKing has a PMSI in the
bike. Furthermore, because the bike was a “consumer good” it would be
automatically perfected, without the need for filing a financing statement,
and BikeKing would also have a “super-priority” in the bike. BikeKing’s
super-priority in the bike takes priority over that of Darius’s interest.
CALL #4 Repossession
July, 2007, Oregon Bar Examination
Question No. 3 - Issue Outline and
Answer That Addresses All Issues
Page 8 of 8
Unless otherwise agreed, a secured party has the right to take
possession of collateral on default under the note or security agreement
terms. A secured party may repossess the secured collateral without use of
judicial process as long as the party does not breach the peace when
repossessing the collateral. A repossession made over any protest by the
debtor or anyone present arguably constitutes “breach of peace” depending on
the jurisdiction. Breaking and entering the debtor’s or other’s property may
also constitute a “breach of peace”. Here, the BikeKing representative took
Moose’s lumber inventory over his express objections. This is likely a breach
of peace. Moreover, BikeKing had no secured interest in Moose’s inventory.
Thus the taking of Moose’s lumber amounts to conversion and is stealing of
Moose’s property. Moose could sue for conversion and recover actual and
perhaps punitive damages.
BikeKing has a “super-priority” secured interest in the bike. Because
the bike was parked in front of Darius’s home, and the BikeKing
representative did not likely have to commit any trespass to take possession
of the bike, there is no “breach of peace.” The repossession of the bike was
lawful.