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ANSWERS TO PROBLEMS
1. Victor sells to Bonnie a refrigerator for $600 payable in monthly installments of $30 for twenty
months. Bonnie signs a security agreement granting Victor a security interest in the refrigerator.
The refrigerator is installed in the kitchen of Bonnie’s apartment. There is no filing of any
financing statement. Assume that after Bonnie has made the first three monthly payments:
(a) Bonnie moves from her apartment and sells the refrigerator in place to the new occupant for
$350 cash. What are the rights of Victor?
(b) Bonnie is adjudicated bankrupt, and her trustee in bankruptcy claims the refrigerator. What are
the rights of the parties?
Answer: (a) Other Buyers. Victor has the right to recover the unpaid balance of the price from the
original buyer Bonnie, but he no longer has a security interest in the refrigerator if the new
occupant of the apartment who purchased it from Bonnie had no knowledge of Victor's security
interest and bought it for value for his own personal, family, or household purposes. In such
2. On January 2, Burt asked Logan to loan him money “against my diamond ring.” Logan agreed
to do so. To guard against intervening liens, Logan received permission to file a financing
statement, and Burt and Logan signed a security agreement giving Logan an interest in the ring.
Burt also signed a financing statement that Logan properly filed on January 3. On January 4,
Burt borrowed money from Tillo, pledging his ring to secure the debt. Tillo took possession of the
ring and paid Burt the money on the same day. The next day, January 5, Logan loaned Burt the
money under the assumption that Burt still had the ring. Who has priority, Logan or Tillo?
Explain.
Answer: Priorities of Secured Creditors Logan has priority. A security interest is perfected when it
has attached and when all of the applicable steps required for perfection have been taken. A
3. Joanna takes a security interest in the equipment in Jason Store and files a financing statement
claiming “equipment and all after-acquired equipment.” Berkeley later sells Jason Store a cash
register, taking a security interest in the register and (a) files nine days after Jason receives the
register, or (b) files twenty-five days after Jason receives the register. If Jason fails to pay both
Joanna and Berkeley and they foreclose their security interests, who has priority on the cash
register?
(Answer: Priorities of Secured Creditors: Conflicting Perfected Non-Inventory Interests. (a)(i) If
Berkeley files 9 days after Jason received the register (i.e.,within 20 days or whatever the
4. Finley Motor Company sells an automobile to Sara and retains a security interest in it. The
automobile is insured, and Finley is named beneficiary. Three days after the automobile is totally
destroyed in an accident, Sara files a petition in bankruptcy. As between Finley and Sara’s trustee
in bankruptcy, who is entitled to the insurance proceeds?
5. On September 5, Wanda, a widow who occasionally teaches piano and organ in her home,
purchased an electric organ from Murphy's music store for $4,800, trading in her old organ for
$1,200 and promising in writing to pay the balance at $120 per month and granting to Murphy a
security interest in the property in terms consistent with and incorporating provisions of the
UCC. A financing statement covering the transaction was also properly filled out and signed, and
Murphy properly filed it. After Wanda failed to make the December or January payments,
Murphy went to her home to collect the payments or take the organ. Finding no one home and the
door unlocked, he went in and took the organ. Two hours later, Tia, a third party and the present
occupant of the house, who had purchased the organ for her own use, stormed into Murphy's
store, demanding the return of the organ. She showed Murphy a bill of sale from Wanda to her,
dated December 15, that listed the organ and other furnishings in the house.
(a) What are the rights of Murphy, Tia, and Wanda?
(b) Would your answer change if Murphy had not (led a financing statement? Why?
(c) Would your answer change if the organ had been principally used to give lessons?
Answer: Perfection/Priorities. (a) Murphy would prevail. Murphy has properly perfected his
security interest and would prevail against both Tia and Wanda. Tia, of course, has a cause of
6. On May 1, Lincoln lends Donaldson $200,000 and receives from Donaldson his agreement to
pay this amount in two years and takes a security interest in the machinery and equipment in
Donaldson’s factory. A proper financing statement is filed with respect to the security agreement.
On August 1, upon Lincoln’s request, Donaldson executes an addendum to the security agreement
covering after-acquired machinery and equipment in Donaldson’s factory. A second financing
statement covering the addendum is filed. In September, Donaldson acquires $50,000 worth of
new equipment from Thompson, which Donaldson installs in his factory. In December, Carter, a
judgment creditor of Donaldson, causes an attachment to issue against the new equipment. What
are the rights of Lincoln, Donaldson, Carter, and Thompson? What can the parties do to best
protect themselves?
Answer: Priorities of Secured Creditors. Lincoln's security interest in the after-acquired equipment
installed in the debtor's factory has priority over the attachment by the judgment creditor Carter.
7. Anita bought a television set from Bertrum for her personal use. Bertrum, who was out of
security agreement forms, showed Anita a form he had executed with Nathan, another consumer.
Anita and Bertrum orally agreed to the terms of the form. Anita subsequently defaulted on
payment, and Bertrum sought to repossess the television.
(a) Explain who would prevail.
(b) Explain whether the result would differ if Bertrum had filed a financing statement.
(c) Explain whether the result would differ if Anita had subsequently sent Bertrum an e-mail that
met all the requirements of an effective security agreement?
Answer: Perfection by Possession.
a) Decision for Anita. Bertrum has neither perfected nor attached his security interest. In
order for a security interest to be enforceable against the debtor it must attach, i.e.: (1) value
8. Aaron bought a television set for personal use from Penny. Aaron properly signed a security
agreement and paid Penny $125 down, as their agreement required. Penny did not file, and
subsequently Aaron sold the television for $800 to Clark, his neighbor, for use in Clark’s hotel
lobby.
(a) When Aaron fails to make the January and February payments, may Penny repossess the
television from Clark?
(b) What if, instead of Aaron's selling the television set to Clark, a judgment creditor levied (sought
possession) on the television? Who would prevail?
(c) What if Clark intended to use the television set in his home? Who would prevail?
Answer: Automatic Perfection.
a) Yes. Penny has automatically perfected her security interest in the television set he sold
to Aaron. Section 9-309(1): a purchase money security interest in consumer goods. Since
Clark bought the television from Aaron for Clark's hotel lobby and not for his own family,
9. Jones bought a used car from the A–Herts Car Rental System, which regularly sold its used
equipment at the end of its fiscal year. First National Bank of Roxboro had previously obtained a
perfected security interest in the car based upon its financing of A–Herts’s automobiles. Upon
A–Herts’s failure to pay, First National is seeking to repossess the car from Jones. Does First
National have an enforceable security interest in the car against Jones? Explain.
Answer: Priorities of Secured Creditors Against Buyers. The answer depends upon whether Jones
is buyer in the ordinary course of business and/or buyer of consumer goods or whether he has
knowledge of the perfected security interest of the First National Bank of Roxboro. A buyer in
10. Allen, Barker, and Cooper are cosureties on a $750,000 loan by Durham National Bank to
Kingston Manufacturing Co., Inc. The maximum liability of the sureties is as follows: Allen—
$750,000, Barker—$300,000, and Cooper—$150,000. If Kingston defaults on the entire
$750,000 loan, what are the liabilities of Allen, Barker, and Cooper?
Answer: Contribution. Their liabilities are as follows: Allen–$468,750; Barker-$187,500; and
Cooper–$93,750, but it is important to understand the difference between their liabilities and the
amount that a creditor may collect. When there is more than one surety, the cosureties are jointly
and severally liable for the principal debtor's default up to the amount of each surety's
11. Peter Diamond owed Carter $500,000 secured by a first mortgage on Diamond’s plant and land.
Stephens was a surety on this obligation in the amount of $250,000. After Diamond defaulted on
the debt, Carter demanded and received payment of $250,000 from Stephens. Carter then
foreclosed upon the mortgage and sold the property for $375,000. What rights, if any, does
Stephens have in the proceeds from the sale of the property?
Answer: Subrogation. Stephens may recover $125,000 from the proceeds. Upon the creditor's full
12. Paula Daniels purchased an automobile from Carey on credit. At the time of the sale, Scott
agreed to be a surety for Paula, who is sixteen years old. The automobile’s odometer stated
52,000 miles, but Carey had turned it back from 72,000 miles. Paula refuses to make any
payments due on the car. Carey proceeds against Paula and Scott. What defenses, if any, are
available to (a) Paula and (b) Scott?
13. Stafford Surety Co. agreed to act as the conditional guarantor of collection on a debt owed by
Preston Decker to Cole. Stafford was paid a premium by Preston to serve as surety. Preston
defaults on the obligation. What are Cole’s rights against Stafford Surety Co.?
14. Campbell loaned Perry Dixon $70,000, which was secured by a possessory security interest in
stock owned by Perry. The stock had a market value of $4,000. In addition, Campbell insisted
that Perry obtain a surety. For a premium, Sutton Surety Co. agreed to act as a surety for the full
amount of the loan. Prior to the due date of the loan, Perry convinced Campbell to return the
stock because its value had increased and he wished to sell it to realize the gain. Campbell
released the stock and Perry subsequently defaulted. Is Sutton released from his liability
15. Pamela Darden owed Clark $5,000 on an unsecured loan. On May 1, Pamela approached Clark
for an additional loan of $3,000. Clark agreed to make the loan only if Pamela could obtain a
surety. On May 5, Simpson agreed to be a surety on the $3,000 loan, which was granted that day.
Both loans were due on October 1. On June 15, Pamela sent $1,000 to Clark but did not provide
any instructions.
(a) What are Clark's rights?
(b) What are Simpson's rights?
16. Patrick Dillon applied for a $10,000 loan from Carlton Savings & Loan. Carlton required him
to obtain a surety. Patrick approached Sinclair Surety Co., which insisted that Patrick provide it
with a financial statement. Patrick did so, but the statement was materially false. In reliance
upon the financial statement and in return for a premium, Sinclair agreed to act as surety. Upon
Sinclair’s commitment to act as surety, Carlton loaned Patrick the $10,000. After one payment of
$400, Patrick defaulted. He then filed a voluntary petition in bankruptcy. Does Sinclair have any
valid defense against Carlton?
17. On June 1, Smith contracted with Martin d/b/a Martin Publishing Company to distribute
Martin’s newspapers and to account for the proceeds. As part of the contract, Smith agreed to
furnish Martin a bond in the amount of $10,000 guaranteeing the payment of the proceeds. At the
time the contract was executed and the credit extended, the bond was not furnished, and no
mention was made as to the prospective sureties. On July 1, Smith signed the bond with Black
and Blue signing as sureties. The bond recited the awarding of the contract for distribution of the
newspapers as consideration for the bond.
On December 1, payment was due from Smith to Mar%n for the sum of $3,600 under the
distributor’s contract. Demand for payment was made, but Smith failed to make payment. As a
result, Mar%n brought an appropriate action against Black and Blue to recover the $3,600. What
result?
Answer: Types of Sureties. Decision for Black and Blue. The promise of a surety is not binding
without consideration. Here, the surety's promise was made after the principal debtor (Smith)
18. Diggitt Construction Company was the low bidder on a well-digging job for the Village of
Drytown. On April 15, Diggitt signed a contract with Drytown for the job at a price of $40,000.
At the same time, pursuant to the notice of bidding, Diggitt prevailed upon Ace Surety Company
to execute a performance bond indemnifying Drytown on the contract. On May 1, after Diggitt
had put in three days on the job, the president of the company refigured his bid and realized that
if his company were to complete the job it would lose $10,000. Accordingly, Diggitt notified
Drytown that it was canceling the contract, effective immediately. What are the rights and duties
of Ace Surety Company?
19. National Cash Register Company (NCR), a manufacturer of cash registers, entered into a sales
contract for a cash register with Edmund Carroll. On November 18, Fire-stone and Company
made a loan to Carroll, who conveyed certain property to Firestone as collateral under a security
agreement. The property outlined in the security agreement included “[a]ll contents of
luncheonette including equipment such as . . . ‘twenty-five different listed items,’ . . . together with
all property and articles now, and which may hereafter be, used . . . with, [or] added . . . to . . .
any of the foregoing described property.” A similarly detailed description of the property
conveyed as collateral appeared in Firestone’s financing statement, but the financing statement
made no mention of property to be acquired thereafter, and neither document made a specific
reference to a cash register. NCR delivered the cash register to Carroll in Canton between
November 19 and November 25 and filed a financing statement with the town clerk of Canton on
December 20 and with the Secretary of State on December 21. Carroll subsequently defaulted
both on the contract with NCR and on the security agreement with Firestone. Firestone took
possession of the cash register and sold it at auction. Discuss whether Firestone has a security
interest in the cash register.
Answer: After-Acquired Property. The question to be decided is whether or not Firestone’s security
interest includes the after-acquired cash register. There are two documents to examine: the
20. National Acceptance Company loaned Ultra Precision Industries $692,000, and to secure
repayment of the loan, Ultra executed a chattel mortgage security agreement on National’s behalf
on March 7, 2008. National perfected the security interest by timely filing a financing statement.
Although the security interest covered specifically described equipment of Ultra, both the security
agreement and the financing statement contained an after-acquired property clause that did not
refer to any specific equipment.
Later in 2008 and in 2009, Ultra placed three separate orders for machines from Wolf Machinery
Company. In each case it was agreed that a;er the machines had been shipped to Ultra and
installed, Ultra would be given an opportunity to test them in opera%on for a reasonable period. If
the machines passed inspection, Wolf would then provide financing that was sa%sfactory to Ultra
and properly (led its financing statement. In all three cases, financing was arranged with
Community Bank (Bank) and accepted, and a security interest was given in the machines.
Furthermore, in each case a security agreement was entered into, and a financing statement was
then (led by the secured parties within ten days. Ultra became bankrupt on October 7, 2011.
national claimed that its security interest in the a;er-acquired machines should take priority over
those of Wolf and Bank because their interests were not perfected by timely (led financing
statements. Discuss who has priority in the disputed collateral.
Answer: Purchase Money Security Interest. Judgment for Wolf and Bank. Wolf and Bank provided
funds for Ultra to purchase the machines and, therefore, had an interest classified as a purchase
money security interest in equipment. National, on the other hand, had an ordinary secured
21. Elizabeth Tilleraas received three student loans totaling $3,500 under the Federal Insured
Student Loan Program (FISLP) of the Higher Education Act. These loans were secured by three
promissory notes executed in favor of Dakota National Bank & Trust Co., Fargo, North Dakota.
Under the terms of these student loans, periodic payments were required beginning twelve
months after Tilleraas ceased to carry at least one-half of a full-time academic workload at an
eligible institution. Her student status terminated on January 28, 2011, and the first installment
payment thus became due January 28, 2012. She never made any payment on any of her loans.
Under the provisions of the FISLP, the United States assured the lender bank repayment in the
event of any failure to pay by the borrower. The first payment due on the loans was in “default”
on July 27, 2012, 180 days after the failure to make the first installment payment. On December
17, 2013, Dakota National Bank & Trust sent notice of its election under the provisions of the
loan to accelerate the maturity of the note. The bank demanded payment in full by December 27,
2013. It then filed FISLP insurance claims against the United States on May 6, 2014, and
assigned the three Tilleraas notes to the United States on May 10, 2014. The government, in turn,
paid the bank’s claim in full on July 5, 2014. The government subsequently filed suit against
Tilleraas. Discuss whether the United States will prevail.
Answer: Rights of Creditor and Surety. Judgment for the United States. A surety is responsible for
the payment of the debt of another should the principal debtor fail to repay the creditor. The
22. New West Fruit Corporation (New West) and Coastal Berry Corporation are both brokers of
fresh strawberries. In the second half of 2012, New West’s predecessor, Monc’s Consolidated
Produce, Inc., loaned money and strawberry plants to a group of strawberry growers known as
Cooperativa La Paz (La Paz). In September 2012, Monc’s and La Paz signed a “Sales and
Marketing Agreement” to allow Monc’s the exclusive right to market the strawberries grown by
La Paz during the 2012-2014 season. The agreement did not mention the advances of money or
plants, but did give Monc’s a security interest in all crops and proceeds on specified property in
the 2013-2014 season. The financing statement was properly signed and filed. Monc’s closed
down in January 2014, and its assets were assigned to New West. In April, New West learned that
La Paz had agreed to market its 2014 crop through Coastal Berry. New West immediately
arranged a meeting to advise the Coastal Berry officers of its contract with the growers. New
West requested that Coastal Berry either pay New West the amounts owed by the growers or
allow New West to market the berries to recover the money. Coastal Berry did not respond. After
Coastal Berry began marketing the berries, New West sent letters demanding payment of the
proceeds. In August 2014, New West filed suit against Coastal Berry, La Paz, the individual
growers, and a berry freezing company that its security interest was valid and that it had duly
notified Coastal Berry both through the financing statement on file and through the letters it had
sent to Coastal Berry directly. Coastal Berry claimed that the security agreement was not
effective because it did not specifically identify the debt (money and plants) being secured.
Discuss.
Answer: Security Agreements. Judgment for New West. A security agreement in some form is
necessary to create a valid security interest. Although the writing does not need to be formally
23. Standridge purchased a Chevrolet automobile from Billy Deavers, an agent of Walker Motor
Company. According to the sales contract, the balance due after the trade-in allowance was
$2,282.50, to be paid in twelve weekly installments. Standridge claims that he was unable to
make the second payment and that Billy Deavers orally agreed that he could make two payments
the next week. The day after the double payment was due, Standridge still had not paid. That day
Ronnie Deavers, Billy’s brother, went to Standridge’s place of employment to repossess the car,
which the Walker Motor contract permitted. Rather than consenting to the repossession,
Standridge drove the car to the Walker Motor Company’s place of business and tendered the
overdue payments. The Deavers refused to accept the late payment and instead demanded the
entire unpaid balance. Standridge could not pay it. The Deavers then blocked Standridge’s car
with another car and told him he could just “walk his . . . home.” Standridge brought suit,
seeking damages for the Deavers’s wrongful repossession of his car. The Deavers deny that they
granted Standridge permission to make a double payment, that Standridge tendered the double
payment, and that they rejected it. They claim that he made no payment and that, therefore, they
were entitled to repossess the car. Discuss whether the car was properly repossessed.
Answer: Default. Judgment for Standridge. Unless otherwise agreed in the contract, the secured
party on default has the right to repossess the collateral without judicial process. Here, the sales
ANSWERS TO “TAKING SIDES” PROBLEMS
James Koontz agreed to purchase a Plymouth Sundance from Chrysler Credit Corporation
(Chrysler) in exchange for sixty payments of $185.92. Koontz soon thereafter defaulted, and
Chrysler notified Koontz that, unless he made the payments, it would repossess the vehicle. Koontz
responded by notifying Chrysler that he would make every effort to make up missed payments, that
he did not want the car repossessed, and that Chrysler was not to enter his private property to
repossess the vehicle. A few weeks later, Chrysler sent the M & M Agency to repossess the vehicle.
When he heard the repossession in progress, Koontz, dressed only in his underwear, came outside
and yelled, “Don’t take it!” The repossessor ignored him and took the car anyway. Koontz did not
physically challenge or threaten the repossessor
(a) Discuss the arguments that Chrysler legally repossessed the automobile.
(b) Discuss arguments that Chrysler illegally repossessed the automobile.
(c) Who should prevail?
ANSWER:
(a) The repossession was legal. Whether a given act provokes a breach of the peace depends
upon the accompanying circumstances of each particular case. In this case, Koontz testified
that he only yelled, “Don't take it,” and that the repossessor made no verbal or physical
