Business Law Chapter 37 Homework Article 9 establishes a complex set of rules that determine

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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.