978-1285770178 Lecture Note BL ComLaw 1e IM-Ch21 Part 3

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

whole or in part.

repossess an automobile, which served as a security for payment of a loan by a debtor, even though the

debtor sent a check to the creditor before the repossession, and the creditor cashed the check and credited it

to the debtor’s account after the repossession, because their contract stated that the debtor would be in

default if she “fail[ed] to make any payment within 10 days after its due date,” and she admitted that she was

“one payment behind” when the vehicle was repossessed).

4. Proceeds from Disposition

Proceeds from the sale must be applied in the following order—

The value of noncash proceeds received on a disposition of collateral must be applied in a

commercially reasonable manner [UCC 9–608(a)(3), 9–615(c)].

6. Deficiency Judgment

The debtor is generally liable for any deficiency between the amount of the debt and whatever the

(1) Classify the collateral.

(2) Determine whether the interest was a PMSI.

whole or in part.

(3) Determine whether a financing statement must be filed to perfect the security interest.

(4) If filing is not required, determine whether perfection can be accomplished without taking possession

of the collateral.

(5) Determine whether possession is the required means of possession or whether it is simply a permitted

means.

(6) If filing is required, determine what the financing statement must state.

(7) Determine where to file.

(8) Once the security interest is perfected, consider the changes that might occur that could affect the

priority of the security interest.

Cyberlaw Link

What changes might the adoption of electronic filing methods, pursuant to the provisions of re-

vised Article 9, have to the business deals underlying secured transactions? Could software or a

database serve as collateral and if so, should there be any additional limits on the electronic

repossession of the software or database? Could electronic repossession be done without first

asking a court for assistance?

1. What is required for an enforceable security interest? To have an enforceable security interest: (1) unless a

creditor has possession of the collateral, there must be an agreement in writing; (2) a creditor must give value to the

debtor; and (3) the debtor must have rights in the collateral. When these requirements are met, a creditor’s rights

attach to the collateral

3. What is perfection? Perfection is the process by which a secured party protects his or her interest against some

claims of third parties (other secured creditors, general creditors, trustees in bankruptcy, and purchasers of collateral

that is subject to a security agreement) who may wish to have their debts satisfied out of the same collateral.

4. What are the methods of perfection and what determines which method is appropriate? Perfection may

whole or in part.

CHAPTER 21: SECURED TRANSACTIONS 23

faith in selling repossessed collateral, without more, cannot establish the commercial reasonableness of the method,

REVIEWING—

 SECURED TRANSACTIONS 

Paul Barton owned a small property-management company, doing business as Brighton Homes. In

October, Barton went on a spending spree. First, he bought a Bose surround-sound system for his home from

KDM Electronics. The next day, he purchased a Wilderness Systems kayak from Outdoor Outfitters, and the

day after that he bought a new Toyota 4-Runner financed through Bridgeport Auto. Two weeks later, Barton

purchased six new iMac computers for his office, also from KDM Electronics. Barton bought each of these

items under installment sales contracts. Six months later, Barton’s property management business went

bankrupt, and he could not make the payments due on any of these purchases and thus defaulted on the

loans. Ask your students to answer the following questions, using the information presented in the chapter.

1. For which of Barton’s purchases (the surround-sound system, the kayak, the 4-Runner, and the

six iMacs) would the creditor need to file a financing statement to perfect its security interest?

Perfecting a security interest in the computers would require him to file a financing statement, because the

computers are classified as equipment (goods bought for use primarily in a business). With respect to the

sound system, the kayak, and the vehicle, when a seller of consumer goods extends credit for the purchase

to a person buying for household purposes, a purchase-money security interest, or PMSI, is created and

attaches automatically, without the filing of a financing statement. In the case of the 4-Runner, motor vehicles

often fall under other state laws concerning such details as their use as collateral and encumbrances on their

titles, but these laws are not discussed in the chapter.)

2. Suppose that Barton’s contract for the office computers mentioned only the name Brighton

Homes. What would be the consequences if KDM Electronics filed a financing statement that listed

only Brighton Homes as the debtor’s name? According to UCC 9-503(c), providing only the debtor’s trade

name (or a fictitious name) in a financing statement is not sufficient for perfection.

3. Which of these purchases would qualify as a PMSI in consumer goods? The sound system, the

kayak, and possibly the vehicle would qualify for purchase-money security interests, or PMSIs. The iMacs

would be classified as equipment and so would not qualify as one of the PMSIs.

4. Suppose that after KDM Electronics repossesses the surround-sound system, the owner decides

to keep the system rather than sell it. Can KDM do this under Article 9? Why or why not? Unless

Barton has paid 60 percent or more of the purchase price, KDM Electronics may keep the surround-sound

system. A secured party can retain repossessed collateral unless it consists of consumer goods on which the

debtor has paid 60 percent or more of the purchase price in a PMSI, in which case the secured party must

sell or otherwise dispose of the repossessed collateral within ninety days. Failure to comply could subject the

secured party to an action for conversion or other liability.

 DEBATE THIS 

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

A financing statement that does not have the debtor’s exact name should still be effective

because creditors should always be protected when debtors default. What is important in secured

transactions is that creditors should be able to attempt to be made whole when debtors stop making

payments on a loan or do not pay back the loan with the agreed–upon interest. Creditors should be able to

take possession of collateral in which the creditors have created a security interest. Just because a creditor

might have made an error in naming the debtor should not prevent the creditor from obtain the collateral in

case of default.

Those creditors who engage in secured transactions have very specific requirements to follow for them

to be able to have priority over collateral in case debtor defaults. If we allowed creditors to become less

accurate with respect to who are the named debtors in filing statements, then the courts would be

overwhelmed with supposedly secured creditors who would claim that they had perfected security interests

even if the named debtors were not correctly listed in financing statements.



EXAMPREP—

 ISSUE SPOTTERS 

1. Nero needs $500 to buy textbooks and other supplies. Olivia agrees to loan Nero $500, accepting

Nero’s computer as collateral. They put their agreement in writing. How can Olivia let other creditors

know of her interest in the computer? A creditor can put other creditors on notice by perfecting his or her

interest: by filing a financing statement in the appropriate public office, or by taking possession of the

collateral until the debtor repays the loan.

2. Liberty Bank loans Michelle $5,000 to buy a car, which is used as collateral to secure the loan.

After repaying less than 50 percent of the loan, Michelle defaults. Liberty could repossess and keep

the car, but the bank does not want it. What are the alternatives? When collateral is consumer goods with

a PMSI, and the debtor has paid less than 60 percent of the debt or the purchase price, the creditor can

dispose of the collateral in a commercially reasonable manner, which generally requires notice to the debtor

of the place, time, and manner of sale. A debtor can waive the right to notice, but only after default. Before the

disposal, a debtor can redeem the collateral by tendering performance of all of the obligations secured by it

and by paying the creditor’s reasonable expenses in retaking and maintaining it.