978-1285770178 Lecture Note BL ComLaw 1e IM-Ch21 Part 2

CHAPTER 21: SECURED TRANSACTIONS 11

whole or in part.

A financing statement is effective for five years from the date of filing [UCC 9–515]. A continuation

statement filed within six months before the expiration date continues the effectiveness for five more

years [UCC 9–515(d), (e)].

ADDITIONAL BACKGROUND—

What Happens When Collateral Is Moved to Another State?

Generally, a properly perfected security interest in collateral moved into a new state continues to be

perfected in the new state for a period of up to four months from the date it was moved or for the period

remaining under the perfection in the original state, whichever expires first [UCC 9–103(1)(d), 9–103(3)(e)].

(Thus, for instance, if there is a properly perfected interest in harvesting equipment that a debtor takes into a

neighboring state, the interest remains effective for up to four months.) Collateral moved from county to

county within a state when local filing is required may not have a four–month limitation, and the original filing

may have continuous priority [see UCC 9–403(3)].

As for automobiles, perfection of a security interest in a motor vehicle varies according to state law, but

typically occurs only when a notation of the interest appears on the vehicle’s certificate of title. If a state does

not require a certificate of title as part of its perfection process, perfection automatically ends four months

after a car is moved into another state. When a security interest exists in a car in a state in which title

registration is required, and the interest is noted on the certificate, perfection of the interest continues after the

car is moved to another state requiring a certificate until the car is registered in the new state [UCC 9–103(2)].

Because each title state requires that the old certificate be surrendered to obtain a new one, and because a

secured party typically holds the certificate, the party can usually ensure that his or her interest is noted on

the new certificate.

12 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

2. A Floating Lien in a Shifting Stock of Goods

The concept applies to goods as they are processed from raw materials to finished goods and sold,

turning into accounts receivable, chattel paper, or cash.

V. Priorities

The text briefly sets out the priority of interests on a debtor’s default. In slightly different (and more

abbreviated) terms, the priorities are—

A. SECURED PARTIES V. OTHER SECURED PARTIES

The first interest to be filed or perfected has priority over other filed or perfected security interests. If no

2. Purchase-Money Security Interest (PMSI)

A perfected PMSI prevails over a previously perfected security interest if the holder of the PMSI

perfects before the debtor takes possession of the collateral or within twenty days [UCC 9–324(a)].

Secured parties (perfected or not) prevail over unsecured creditors and creditors who have obtained

judgments against the debtor but who have not begun the legal process to collect on those judgments

[UCC 9–201(a)].

C. SECURED PARTIES V. BUYERS

2. Buyers of Consumer Goods Purchased outside the Ordinary Course of Business

The buyer must give value and not know of the security interest; the purchase must occur before

the secured party perfects by filing [UCC 9–320(b)].

CHAPTER 21: SECURED TRANSACTIONS 13

whole or in part.

A buyer from a farmer has priority over a perfected security interest unless, in some states, the se–

cured party has filed centrally an effective financing statement or the buyer has notice before the

sale.

VI. Rights and Duties of Debtors and Creditors

If a security agreement does not provide to the contrary—

A. INFORMATION REQUESTS

When filing a financing statement, a creditor can ask for a copy [UCC 9–523(a)]. A prospective creditor

can ask for information on possible perfected financing statements involving a named individual [UCC 9–

C. CONFIRMATION OR ACCOUNTING REQUEST BY DEBTOR

A debtor can ask about the amount of a debt as of a specific date [UCC 9–210].

D. TERMINATION STATEMENT

VII. Default

A. WHAT CONSTITUTES DEFAULT

Because Article 9 does not define default, the parties can decide for themselves what constitutes de–

A secured party can take possession of collateral on default unless the security agreement states

otherwise, as long as there is no breach of the peace. Otherwise the party must resort to judicial

process [UCC 9–609]. Other state law determines what constitutes breach of the peace (generally,

trespass onto real property, assault, battery, or breaking and entering).

ADDITIONAL BACKGROUND—

Breach of the Peace

George Salisbury III borrowed $13,000 from Colorado Central Credit Union, giving as collateral several

vehicles that he owned. Salisbury defaulted on the loan, and Colorado Central hired a repossession company

to repossess the vehicles. The repossession crew towed away one of the vehicles from Salisbury’s property

in Slater, Colorado, near the Wyoming border. The crew found two other vehicles on a ranch just across the

border, after following a private roadway with a large “Salisbury” sign near the entrance. It was early in the

morning, and although the crew could hear people stirring in a nearby building, they encountered no one

while towing the vehicles away. The ranch was owned by Salisbury’s father. The father, doing business as

Salisbury Livestock Company, brought an action for trespass against Colorado Central. The trial court,

holding that the trespass was privileged and did not result in any breach of the peace, entered a directed

verdict for Colorado Central. Salisbury Livestock appealed, contending that the trespass itself—onto land

owned by a third party—constituted a breach of the peace.

In Salisbury Livestock Co. v. Colorado Central Credit Union, 793 P.2d 470 (Wyo. 1990), the Supreme

Court of Wyoming reversed the trial court’s decision and remanded the case for trial. The state supreme court

concluded that whether Colorado Central’s entry onto Salisbury Livestock’s property was reasonable or

breached the peace was a question for the jury, and therefore the trial court’s directed verdict was

inappropriate. The court stated that a trespass becomes a breach of the peace if certain types of premises

are invaded, or immediate violence is likely, but neither confrontation nor violence is necessary. The court

noted two elements of the case that could lead jurors to conclude that the trespass was a breach of the

peace: there was an entry onto the premises of a third party not privy to the loan agreement and those

premises were residential—”the secluded ranchyard of an isolated ranch where the vehicles sought [were] not

even visible from a public place. * * * [T]he location and setting * * * is sufficiently distinct, and the privacy

expectations of rural residents sufficiently different, that a jury should weigh the reasonableness of this entry,

or whether the peace may have been breached by a real possibility of imminent violence, or even by mere

entry into these premises.”

2. Judicial Remedies

A secured party’s other basic remedies include proceeding to judgment on the underlying debt

(execution and levy). This is rarely used, unless the value of the collateral is considerably below the

amount of the debt and the debtor has other assets to satisfy the debt [UCC 9–601(a)].

B. DISPOSITION OF COLLATERAL

To retain the collateral, the creditor must notify the debtor and, in some cases, other secured

parties.

b. Objections

If the debtor or secured party objects within twenty days, the collateral must be sold.

whole or in part.

b. Must Be Commercially Reasonable

Generally, for a sale to be conducted in a commercially reasonable manner, notice of the

place, time, and manner of sale is required [UCC 9–602, 9–603, 9–610, 9–

CASE SYNOPSIS—

Case 21.3: Smith v. Firstbank Corp.

Bradley Smith, on his own behalf and on behalf of the John J. Smith Revocable Living Trust, borrowed

funds from Firstbank Corp. secured with pledges of Sparton Corp. stock and other collateral. When the loans

were not paid, Firstbank sold the stock in private sales, returned the other collateral, and remitted the excess

funds collected to Smith and the trust. Alleging that the sales were not commercially reasonable because a

higher price might have been obtained in a public sale, Smith and the trust filed a suit in a Michigan state

court against Firstbank. The court ruled in the bank’s favor. The plaintiffs appealed.

A state intermediate appellate court affirmed. “The defendant had valid reasons for choosing a private

sale, and made efforts to obtain a reasonable price for the shares. In fact, the method chosen by defendant

allowed plaintiffs to retain over five million dollars of collateral, as well as a net surplus on the sale of [the]

stock.”

………………….………….………………………….………….………………………….………………..…………….

Notes and Questions

Which of the two methods for proving that a sale was commercially reasonable is likely more

difficult to apply? Showing conformity with the practices of “reputable dealers in the trade” conclusively

establishes that a sale was commercially reasonable. For this reason, secured parties often use that method

to prove their compliance with the UCC’s requirements. If this method is not used, a secured party must show

that every aspect of a sale is “commercially reasonable.” This requires a secured party to establish

considerably more than that a fair price for the collateral was obtained.

What are the consequences of a party’s failure to establish that a sale of repossessed consumer

collateral was commercially reasonable? In this case, the court ruled that a secured party’s failure to

establish a commercially reasonable sale of repossessed consumer collateral barred it from recovering any

deficiency. A consumer debtor should be able to ensure that a secured party followed procedures designed to

yield the highest available sale price. If the secured party cannot show that it sold the collateral in a commer–

cially reasonable manner, the debtor cannot make this determination.

Should a court’s scrutiny of the price paid for collateral be different when the purchaser is the

secured party or someone related to the secured party? Explain. Yes. When the party who acquires the

whole or in part.

collateral at a “commercially reasonable sale” is the secured party or someone related to the secured party (or

even a secondary obligor), there may be no incentive to maximize the proceeds from the sale, as there might

be if the debtor were selling the property. A low price on a sale to such a party does not necessarily constitute

noncompliance with the requirements of Article 9. But, under UCC 9–615(f), the calculation of any deficiency

is based not on the actual amount of the proceeds but on the amount that would have been received in a

commercially reasonable sale to someone other than those parties. A low price on a sale to such a party does

not necessarily constitute noncompliance with the requirements of Article 9.

Why does UCC 9–627(b)(3) require that a sale be conducted in conformity with the reasonable

commercial practices among dealers in the type of property that was the subject of the disposition? If

this were not a requirement, some dealers in an industry might collude to set low standards for “commercially

reasonable” sales. In such cases, debtors would be treated unfairly. Setting a higher bar establishes a more

equitable legal standard and encourages creditors to act ethically.

Suppose that Firstbank had argued that private sales generally yield higher prices, and because

the stock was sold in private sales, they must have been commercially reasonable. Should the court

have ruled in favor of the bank on this ground? Explain your answer. No. Even if private sales generally

result in higher sales prices than other methods, this would not prove that the specific sale in this case

resulted in a higher price. A sale for the highest price at a poorly publicized, inconveniently located, or quickly

transacted private sale would not likely result in a reasonable price. The argument posited in this question,

without more detail, would not establish commercial reasonableness.

ANSWERS TO THE LEGAL REASONING

QUESTIONS AT THE END OF CASE 21.3

1. What type of property was at the center of the dispute in this case? How did that property become

involved in the dispute? At the center of the dispute in this case were shares of stock in Sparton

Corporation. The shares were owned and pledged as collateral for loans by Bradley Smith, on his own behalf

and on behalf of the John J. Smith Revocable Living Trust. The loans consisted of borrowed funds from

Firstbank Corporation.

“

The stock became the center of a dispute after the debtors defaulted on their obligations. The lender took

possession of the pledged shares and sold them in two private transactions to recoup the funds lost on the

loans. The creditor then released the remaining collateral to Smith and the trust and also remitted the excess

funds collected in the private sales. The dispute focused on the price of the stock on its sale.

2. On what ground did the plaintiffs argue that the bank should not have been granted a summary

judgment? The debtors, Bradley Smith and the John J. Smith Revocable Living Trust, filed a suit in a

Michigan state court against the creditor, Firstbank Corporation, alleging that the lender’s sales of the debtors’

stock in Sparton Corporation were “commercially unreasonable.” The UCC requires that “every aspect of a

disposition of collateral, including the method, manner, time, place, and other terms, must be commercially

reasonable.” Firstbank filed a motion for a summary disposition. The court issued the judgment. Smith and the

trust appealed.

3. Why does collateral have to be disposed of in a commercially reasonable manner? Is price alone