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CASE 37-2
KIMBRELL’S OF SANFORD, INC. v. KPS, INC.
Court of Appeals of North Carolina, 1994
113 N.C.App 830,440 S.E.2d 329 http://scholar.google.com/scholar_case?case=59507666894516031
62&hl=en&as_sdt=2&as_vis=1 i=scholarr
McCrodden, J.
This action arises out of plaintiff’s attempt to recover from defendant KPS, Inc. a VCR
which plaintiff had sold to defendant Burns and which Burns had immediately pawned at the
Kendale Pawn Shop. Plaintiff filed a complaint in small claims court, and the magistrate,
after a hearing on 17 February 1992, entered judgment denying plaintiff recovery of the
VCR. Plaintiff appealed to the district court. Judge William A. Christian, sitting without a
Plaintiff argues that the judgment denying it recovery of the VCR contravened Article 9
of the Uniform Commercial Code, [citation]. We agree.
At the time defendant Burns purchased the VCR from plaintiff, he signed a purchase
money security agreement, thereby granting plaintiff a purchase money security interest in
the VCR. [UCC] §9-107 [Revised §9-103]. Since a VCR is a consumer good, [UCC]
§9-109(1) [Revised §9-102(a)(23)], plaintiff did not have to file a financing statement in
order to perfect its purchase money security interest in the VCR. [UCC] §9-302(1)(d)
[Revised §9-309]. Defendant Burns failed to make any further payments for the VCR and
defaulted on the security agreement. Therefore, plaintiff was entitled to recover possession
Temporary Perfection
Security interests in some types of collateral are automatically perfected but
only for a temporary period. A security interest in negotiable documents or
instruments is automatically perfected, without filing or taking possession,
for twenty days from the time it attaches, to the extent of the new value
given under a written security agreement.
Perfection by Control
Control may be used to perfect a security interest in electronic chattel paper,
investment property, non-consumer deposit accounts, and letter-of-credit
rights
NOTE: See Figure 37-4: Methods of Perfecting Security Interests.
*** Chapter Outcome***
Discuss the priorities among the various parties who may have competing interests in
collateral
E. PRIORITIES AMONG COMPETING INTERESTS
Perfection of a security interest does not provide the secured party with a
priority over all third parties; sometimes, even an unperfected but attached
security interest has priority. Article 9 establishes a complex set of rules that
determine the relative priorities among these parties.
NOTE: See Figure 37-5: Priorities.
Against Unsecured Creditors
An attached, though unperfected, security interest will defeat the claims of
an unsecured creditor.
Against Other Secured Creditors
Perfected versus Unperfected — Perfected interests prevail over those
that are unperfected.
Perfected versus Perfected — The first party to file or perfect will prevail.
Exceptions: (1) A PMSI in noninventory collateral will take priority over a
previously perfected security interest if perfection of the PMSI (i.e., filing) is
accomplished when the debtor takes possession or within the twenty day
grace period.
(2) A PMSI in inventory has priority over earlier-filed security interests in
inventory if the holder (a) perfects his interest in the inventory at the time
(3) A security interest perfected by control in deposit accounts,
letter-of-credit rights, or investment property has priority over a con.icting
perfected security interest held by a secured party who does not have
control.
Unperfected versus Unperfected — If neither security interest is
perfected, the first to attach has priority. If neither attaches, both creditors
are general, unsecured creditors.
Against Buyers
A security interest continues even in collateral that is sold, unless the
secured party authorizes the sale, but in some cases, buyers of collateral
sold without the secured party’s authorization take it free of the security
interest.
Buyers in the Ordinary Course of Business — someone who purchases
in good faith, from a merchant, without knowledge that the sale violates a
security interest of a third party — takes collateral free of any security
interest created by her seller, even if the security interest is perfected and
the buyer knows of its existence.
Buyers of Farm Products — Protected by the Federal Food Security Act,
Buyers of Other Collateral — To the extent provided by U.C.C. Articles 3,
7, and 8, a secured party who has a perfected security interest in a
negotiable instrument, a negotiable document of title, or a security
has a subordinate interest to a purchaser of (1) the instrument who
has the rights of a holder in due course, (2) the document of title to
Against Lien Creditors
A lien creditor (one who has acquired an interest in the property by judicial
decree) with a perfected security interest or agricultural lien has priority
over lien creditors who acquire their liens after perfection, An unperfected
security interest or agricultural lien is subordinate to the rights of one who
becomes a lien creditor before (1) its perfection or (2) a financing statement
Against Trustee in Bankruptcy
A trustee in bankruptcy is a representative of an estate in bankruptcy;
responsible for collecting, liquidating, and distributing the debtor’s assets.
May invalidate secured claims in certain instances.
NOTE: The role of a trustee in bankruptcy will be examined in greater detail in Chapter 39.
Priority Over Unperfected Security Interest — The trustee in
bankruptcy has priority over a creditor whose security interest was not
perfected when the bankruptcy petition was filed. A creditor with a purchase
Avoidance of Preferential Transfers — Trustee in bankruptcy may
invalidate a transfer of property from the debtor, if all these are true: (1) it
benefited a creditor; (2) it was for an antecedent debt; (3) the debtor was
insolvent; (4) made on or within ninety days before the filing of the
F. DEFAULT
Upon default the secured party is entitled to possession of the collateral.
Unless the debtor has waived his rights in the collateral after default, he has
a right of redemption.
Repossession
Unless the parties have agreed otherwise, the secured party may take
possession of the collateral on default without judicial process if she can do
so without a breach of the peace. Instead of repossessing the collateral, he
may render it unusable and leave it on the debtor’s premises until disposing
of it.
CASE 37-3
CHAPA v. TRACIERS & ASSOCIATES
Ford Motor Credit Corp. (“FMCC”) hired Traciers & Associates (“Traciers”) to
repossess a white 2002 Ford Expedition owned by Marissa Chapa, who was in default on the
associated promissory note. Traciers assigned the job to its field manager, Paul Chambers,
and gave him an address where the vehicle could be found. FMCC, Traciers, and Chambers
were unaware that the address was that of Marissa’s brother, Carlos Chapa. Coincidentally,
Carlos and his wife Maria Chapa also had purchased a white Ford Expedition financed by
FMCC. Their vehicle, however, was a 2003 model, and the Chapas were not in default.
Unseen by Chambers, Maria Chapa left the house and helped her two sons, ages ten and
six, into the Expedition for the trip to school. Her mother-in-law’s vehicle was parked
behind her, so Maria backed her mother-in-law’s vehicle into the street, then backed her
Expedition out of the driveway and parked on the street. She left the keys to her truck in the
ignition with the motor running while she parked her mother-in-law’s car back in the
driveway and reentered the house to return her mother-in-law’s keys.
Meanwhile, on an adjacent street, Chambers noticed that the Expedition’s wheels were
turning, indicating to him that the vehicle’s engine was running. He stopped the tow truck
and heard a sound from the Expedition. Looking inside, he discovered the two Chapa
children. After he persuaded one of the boys to unlock the vehicle, Chambers drove the
Expedition back to the Chapas’ house. He returned the keys to Maria, who was outside her
house, crying. By the time emergency personnel and Carlos Chapa arrived, the children were
back home and Chambers had left the scene.
* * *
The Chapas first argue that the trial court erred in granting summary judgment against
them on their claim that appellees are liable under [UCC] section 9.609. This statute
provides in pertinent part:
(a) After default, a secured party:
(1) may take possession of the collateral;
(b) A secured party may proceed under Subsection (a): * * *
(2) without judicial process, if it proceeds without breach of the peace. [Citation.]
The Chapas correctly point out that this statute imposes a duty on secured creditors to
take precautions for public safety when repossessing property. [Citation.] Thus, the creditor
who elects to pursue nonjudical repossession assumes the risk that a breach of the peace
* * *
Most frequently, the expression “breach of the peace” as used in the Uniform
Commercial Code “connotes conduct that incites or is likely to incite immediate public
turbulence, or that leads to or is likely to lead to an immediate loss of public order and
tranquility.” [Citations.] (“[S]ecured creditor, in exercising privilege to enter upon premises
of another to repossess collateral, may not perpetrate ‘[a]ny act or action manifesting force
or violence, or naturally calculated to provide a breach of peace’) [Citations.] (“[A]lthough
actual violence is not required to find ‘breach of the peace,’ within meaning of self-help
repossession statute, disturbance or violence must be reasonably likely, and not merely a
Here, there is no evidence that Chambers proceeded with the attempted repossession
over an objection communicated to him at, near, or incident to the seizure of the property. To
the contrary, Chambers immediately “desisted” repossession efforts and peaceably returned
the vehicle and the children when he learned of their presence. Moreover, Chambers actively
avoided confrontation. By removing an apparently unoccupied vehicle from a public street
held to constitute a breach of the peace. [Citation,] (deputy sheriff did not breach the peace
when he repossessed debtor’s truck because, even if he violated traffic regulation when he
Sale of Collateral
The secured party may sell (at public or private sale), lease, or otherwise
dispose of any collateral in its current condition at the time of default or
following any commercially reasonable preparation or processing. The
debtor may be entitled to any surplus and liable for any deficiency.
Acceptance of Collateral
The secured party or lien holder may send written notice to the debtor and
to other secured parties that he proposes to retain the collateral in
satisfaction of the obligation. If he receives no objection within twenty days,
II. SURETYSHIP
A surety is someone in addition to the debtor who promises to fulfill the
obligation. Sureties are commonly used in contracts involving minors, so
that there is a party with full contractual capacity responsible for the
obligations arising from the contract.
A. NATURE AND FORMATION
The suretyship relationship involves three parties—principal debtor, creditor,
and surety—and three contractual obligations.
Cosurety — each of two or more sureties who are liable for the same
debt of the principal debtor
Absolute Surety — surety liable to a creditor immediately upon the
default of a principal debtor
debtor.
NOTE: The suretyship relationship is illustrated by Figure 37-6.
Types of Sureties
A simple suretyship arrangement is one where the surety promises to repay
the loan if the primary debtor defaults. In this arrangement, the surety’s
promise gives the creditor recourse for payment against two persons—the
principal debtor and the surety—instead of one, thereby reducing the
creditor’s risk of loss. A common example is the assumption of a mortgage.
However, a purchaser who does not assume the mortgage, but simply takes
the property subject to the mortgage, is not personally liable for the
mortgage; nor is he a surety for the mortgage obligation. In this case, the
purchaser’s potential loss is limited to the value of the property, for although
NOTE: See Figure 37-7: Assumption of Mortgage.
*** Chapter Outcome***
Explain the requirements for the formation of a suretyship relationship.
Formation
All contract elements must be present, and the statute of frauds generally
requires that surety agreements be in writing. The promise of a surety is not
binding without consideration.
*** Chapter Outcome***
Explain the rights of a creditor against a surety and the rights of a surety, including
those of a cosurety.
B. RIGHTS OF SURETY
If the surety is an absolute surety, the creditor may hold the surety liable as
soon as the principal debtor defaults. In contrast, a surety who is a
conditional guarantor of collection is liable only when the creditor exhausts
his legal remedies against the principal debtor.
Exoneration
debtor.
A surety also has a right of exoneration against his cosureties to require each
to pay her proportionate share of the principal debtor’s obligation.
Reimbursement
A surety who pays the creditor has a right to recover payment from the
principal debtor.
Subrogation
On payment of the principal debtor’s entire obligation, the surety “steps into
the shoes” of the creditor. Called subrogation, this confers on the surety all
the rights the creditor has against or through the principal debtor.
Contribution
C. DEFENSES OF SURETY AND PRINCIPAL DEBTOR
The obligations the principal debtor and the surety owe to the creditor arise
out of contracts, so the usual contractual defenses apply; some are available
only to the principal debtor, some only to the surety, and others to both
parties.
NOTE: See Figure 37-8: Defenses of Surety and Principle Debtor.
Personal Defenses of Principal Debtor
The defenses available only to a principal debtor are known as the personal
defenses of the principal debtor. These include:
Personal Defenses of Surety
Those defenses that only the surety may assert are called personal defenses
of the surety. These include:
• The incapacity of the surety
• Noncompliance with the statute of frauds in the surety’s contract
• The absence of mutual assent or consideration to support the surety’s
obligation
Defenses of Both Surety and Principal Debtor
A number of defenses are available to both the surety and the principal
debtor. These include:
• The principal debtor’s signature is forged on an instrument
• Fraud or duress exerted by the creditor on the principal debtor
• Fraudulent and material alteration of the contract instrument by the
creditor
CASE 37-4
AMERICAN MANUFACTURING MUTUAL INSURANCE
COMPANY v. TISON HOG MARKET, INC.
United States Court of Appeals, Eleventh Circuit, 1999
182 F.3d 1284, cert. denied, 531 U.S.819, 121 S.Ct. 59, 148 L.Ed.2d 26 (2000)
http://scholar.google.com/scholar_case?
case=13887389829730083003&q=182+F.3d+1284&hl=en&as_sdt=2,34
Cox, J.
[Every livestock dealer must execute and maintain a reasonable bond to secure the
performance of its obligations. Thurston Paulk, doing business as Paulk Livestock Company
(Paulk Livestock), and Coffee County Stockyard, Incorporated (Coffee County Livestock),
both livestock dealers, applied to plaintiff American Manufacturing Mutual Insurance
Company (American) to serve as a surety and issue bonds for them to meet their legal
requirements. The applications for both bonds contained agreements to indemnify American
Georgia Farm Bureau Marketing Association, Inc. When the defendant hog sellers did not
receive payment for the hogs, they made claims against American on the surety bonds for
the purchase money that they were owed. American conducted an investigation and learned
that the bonds’ indemnification agreements contained forged signatures of Ashley Paulk and
Betty Paulk. American claimed that it would not have issued the bonds had it known that
Betty and Ashley Paulk had not agreed to indemnify it, and it declared the bonds rescinded
and returned all the premiums.
It is well established under the common law of suretyship that “fraud or
misrepresentation practiced by the principal alone on the surety, without any knowledge or
participation on the part of the creditor or obligee, in inducing the surety to enter into the
suretyship contract will not affect the liability of the surety.” [Citations.] From a practical
standpoint, this common law treatment of a principal’s fraud is the only one that makes
sense. A creditor does business with a principal in reliance upon the existence of a bond. The
bond provides security for the creditor because normally the creditor would have no way of
knowing whether the principal is insolvent or otherwise an unreliable party with which to
* * *
Instead of applying * * * insurance law, however, the district court should have applied
Georgia surety law. The surety bonds in this case are surety contracts that are not governed
exclusively by the insurance law of Georgia. * * *
The Georgia Code contains an entirely separate title that applies to suretyship contracts.
[Citation.] The chapter defines a contract of suretyship as one “whereby a person obligates
himself to pay the debt of another in consideration of a benefit flowing to the surety * * *”
if the principal commits fraud so long as the creditor does not participate in the fraud.
[Citation.] * * *
Applying the common law to the case at bar, there is no evidence that the defendants
participated in any fraud. The fraud was committed solely by the principals. Under these
circumstances, American is not relieved of liability on the bonds.
