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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
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
