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in whole or in part.
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 21.1—QUESTIONS (PAGE 403)
THE LEGAL ENVIRONMENT DIMENSION
place.
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Angell had listed only the cows’ names and not their eartag designations.
Would the result have been different? Explain. It is not likely that the result would have been
CASE 21.2—QUESTIONS (PAGE 405)
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that searches of the Florida and New York records had revealed that Regions
was a secured creditor of Camtech and Avstar Fuel. Would the result have been different
in whole or in part.
3A. Why does collateral have to be disposed of in a commercially reasonable manner?
party [UCC 9–626(a)(3)].
The purpose of requiring commercially reasonable conduct is to obtain a satisfactory
price, but price alone is not enough to prove reasonableness. The courts look at many factors to
determine reasonableness. Every aspect of a sale must be conducted in a commercially
reasonable manner. Under UCC 9–627(b)(3), this can happen if a sale conforms with the
defaulted on their loans. Firstbank sold the shares in two private transactions that the debtors
alleged were not commercially reasonable, as required under the UCC for a creditor’s sale of
collateral. To determine whether the sale was commercially reasonable, the court looked at the
manner in which the sale was conducted. Here, Firstbank sought multiple offers to obtain the
best price for the stock. The court also pointed out that “the circumstances surrounding previous
survive a motion for summary disposition.”
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
filing of a financing statement. In the case of the 4-Runner, motor vehicles often fall under other
4 UNIT FIVE: CREDITORS’ RIGHTS AND BANKRUPTCY
in whole or in part.
state laws concerning such details as their use as collateral and encumbrances on their titles,
but these laws are not discussed in the chapter.
2A. 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.
3A. Purchase-money security interests
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
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.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
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
CHAPTER 21: SECURED TRANSACTIONS 5
in whole or in part.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. 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 its interest: by filing a financing statement in the appropriate
public office, or by taking possession of the collateral until the debtor repays the loan.
2A. Liberty Bank loans Michelle $5,000 to buy a car, which is used as collateral to
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.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
free of a security interest created by his seller even though the security interest is perfected and
even though the buyer knows of its existence.” Garfield purchased a generator from Redford, a
seller who deals in goods of that kind. Thus, Garfield is a buyer in the ordinary course of
business. Mallon’s perfection of its security interest in the generators sold to Redford as inven-
tory is not effective against Garfield, even if Garfield knows of Mallon’s perfection or security
tension in the original perfection or perfect such separately within the twenty-one days [UCC 9–
315].
6 UNIT FIVE: CREDITORS’ RIGHTS AND BANKRUPTCY
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
21-2A. Perfection of a security interest
(Chapter 21—Page 400)
The creditor has a security interest in the collateral and is a perfected secured party. To create a
security interest, the following criteria must be met [UCC 9–203]:
(a) Unless the collateral is in the possession of the secured party, a debtor must sign a
security agreement describing the collateral.
(b) The secured party must give value to the debtor.
(c) The debtor must have rights in the collateral.
21-3A. The scope of a security interest
(Chapter 21—Page 408)
No. The bank will prevail because it held a properly perfected security interest in Edward’s entire
inventory, not just in specific items or in the value of the inventory at the time the loan was
Yes, the bank’s security interest has priority over Radio Shack’s claims. The Boudreauxes
bought the original inventory in their individual names, and gave the bank a security interest in
the original and future inventory. Furthermore, the bank perfected its security interest in existing
and future inventory owned by Boudreauxes by filing financing statements that listed
Boudreauxes and D & J Enterprises, Inc. Radio Shack was not misled by the debtors’ change
UCC, these remedies are cumulative and can be exercised simultaneously. A secured creditor
can repossess and retain a debtor’s collateral in full or partial satisfaction of the debt. The
collateral does not have to be disposed of first unless the parties have agreed otherwise. If the
collateral satisfies the debt only partially, the creditor can seek a judgment for the balance due.
Of course, it would not be fair for a creditor to deprive a debtor of the possession of the
in whole or in part.
in whole or in part.
In the actual case on which this problem is based, the court concluded that all of the
plain and obvious meaning of its terms.
In this problem, the loan agreement between Barclays and Poynter gave Barclays
multiple stand-alone options on default. One option required the lender to give ten days’
advance notice of a sale. A different option permitted the lender to avoid this requirement. When
Poynter did not repay the loan, Barclays repossessed the yacht, notified Poynter that it would be
favor. On Poynter’s appeal, the U.S. Court of Appeals for the First Circuit affirmed. The loan
agreement “gave Barclays multiple stand-alone options upon default and, given these choices, it
opted to conduct a sale under” a provision of the agreement that did not require ten days’
advance notice of sale.
FIB responded that one of its officers “fully informed” Denton about the structure of the two
loans, that Denton knew the SBA loan would have priority to the collateral on Anderson’s
default, and that Denton agreed to this arrangement. The state supreme court affirmed the lower
court’s decision. “Our review of the record confirms that significant evidence was presented that
would allow the . . . Court to conclude that Denton knew his loan would hold a second position
care or to read the document in its entirety before signing it. Besides, FIB asserted, Denton was
not denied the opportunity to negotiate the terms and he admitted that he “studied” the note
before signing it.
CHAPTER 21: SECURED TRANSACTIONS 9
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
The court concluded that the loan contract was not unenforceable as a contract of
adhesion, and the state supreme court affirmed this conclusion. The higher court pointed out
that “[a] contract of adhesion is a contract whose terms are dictated by one contracting party to
another who has no voice in its formulation. Contracts of adhesion are unenforceable if not
within the reasonable expectations of the weaker party or if they are unduly oppressive,
unconscionable, or against public policy. . . .
“[I]nequality in bargaining power does not equate to unenforceability and not all
standardized contracts are unenforceable as adhesion contracts. Denton . . . was a so-
reasonable expectation.”
21–10A. LEGAL REASONING GROUP ACTIVITY—Security Interests
(a) The requirements that must be met for a creditor to have an enforceable security
interest are (1) the collateral must either (a) be in the possession of the secured party pursuant
others’ use of the property to secure interests in which the owners have no part.
(b) A security interest is not enforceable unless it attaches to the collateral. For
attachment to occur, under UCC 9–203 the debtor must have rights in the collateral, the secured
party must give something of value to the debtor, and the creditor must either possess the
collateral or there must be a security agreement that contains a description of the collateral and
collateral in a signed or authenticated document or in a separate document incorporated by
reference into a signed or authenticated document, no security interest can be recognized.
(c) As noted in the answer to the previous question, the debtor did not sign the
financing statement. Under the UCC, without a description of the collateral in a signed or
authenticated document or in a separate document incorporated by reference into a signed or
authenticated document, no security interest can exist.
in whole or in part.
3A. Why does collateral have to be disposed of in a commercially reasonable manner?
party [UCC 9–626(a)(3)].
The purpose of requiring commercially reasonable conduct is to obtain a satisfactory
price, but price alone is not enough to prove reasonableness. The courts look at many factors to
determine reasonableness. Every aspect of a sale must be conducted in a commercially
reasonable manner. Under UCC 9–627(b)(3), this can happen if a sale conforms with the
defaulted on their loans. Firstbank sold the shares in two private transactions that the debtors
alleged were not commercially reasonable, as required under the UCC for a creditor’s sale of
collateral. To determine whether the sale was commercially reasonable, the court looked at the
manner in which the sale was conducted. Here, Firstbank sought multiple offers to obtain the
best price for the stock. The court also pointed out that “the circumstances surrounding previous
survive a motion for summary disposition.”
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
filing of a financing statement. In the case of the 4-Runner, motor vehicles often fall under other
4 UNIT FIVE: CREDITORS’ RIGHTS AND BANKRUPTCY
in whole or in part.
state laws concerning such details as their use as collateral and encumbrances on their titles,
but these laws are not discussed in the chapter.
2A. 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.
3A. Purchase-money security interests
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
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.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
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
CHAPTER 21: SECURED TRANSACTIONS 5
in whole or in part.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. 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 its interest: by filing a financing statement in the appropriate
public office, or by taking possession of the collateral until the debtor repays the loan.
2A. Liberty Bank loans Michelle $5,000 to buy a car, which is used as collateral to
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.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
free of a security interest created by his seller even though the security interest is perfected and
even though the buyer knows of its existence.” Garfield purchased a generator from Redford, a
seller who deals in goods of that kind. Thus, Garfield is a buyer in the ordinary course of
business. Mallon’s perfection of its security interest in the generators sold to Redford as inven-
tory is not effective against Garfield, even if Garfield knows of Mallon’s perfection or security
tension in the original perfection or perfect such separately within the twenty-one days [UCC 9–
315].
6 UNIT FIVE: CREDITORS’ RIGHTS AND BANKRUPTCY
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
21-2A. Perfection of a security interest
(Chapter 21—Page 400)
The creditor has a security interest in the collateral and is a perfected secured party. To create a
security interest, the following criteria must be met [UCC 9–203]:
(a) Unless the collateral is in the possession of the secured party, a debtor must sign a
security agreement describing the collateral.
(b) The secured party must give value to the debtor.
(c) The debtor must have rights in the collateral.
21-3A. The scope of a security interest
(Chapter 21—Page 408)
No. The bank will prevail because it held a properly perfected security interest in Edward’s entire
inventory, not just in specific items or in the value of the inventory at the time the loan was
Yes, the bank’s security interest has priority over Radio Shack’s claims. The Boudreauxes
bought the original inventory in their individual names, and gave the bank a security interest in
the original and future inventory. Furthermore, the bank perfected its security interest in existing
and future inventory owned by Boudreauxes by filing financing statements that listed
Boudreauxes and D & J Enterprises, Inc. Radio Shack was not misled by the debtors’ change
UCC, these remedies are cumulative and can be exercised simultaneously. A secured creditor
can repossess and retain a debtor’s collateral in full or partial satisfaction of the debt. The
collateral does not have to be disposed of first unless the parties have agreed otherwise. If the
collateral satisfies the debt only partially, the creditor can seek a judgment for the balance due.
Of course, it would not be fair for a creditor to deprive a debtor of the possession of the
in whole or in part.
in whole or in part.
In the actual case on which this problem is based, the court concluded that all of the
plain and obvious meaning of its terms.
In this problem, the loan agreement between Barclays and Poynter gave Barclays
multiple stand-alone options on default. One option required the lender to give ten days’
advance notice of a sale. A different option permitted the lender to avoid this requirement. When
Poynter did not repay the loan, Barclays repossessed the yacht, notified Poynter that it would be
favor. On Poynter’s appeal, the U.S. Court of Appeals for the First Circuit affirmed. The loan
agreement “gave Barclays multiple stand-alone options upon default and, given these choices, it
opted to conduct a sale under” a provision of the agreement that did not require ten days’
advance notice of sale.
FIB responded that one of its officers “fully informed” Denton about the structure of the two
loans, that Denton knew the SBA loan would have priority to the collateral on Anderson’s
default, and that Denton agreed to this arrangement. The state supreme court affirmed the lower
court’s decision. “Our review of the record confirms that significant evidence was presented that
would allow the . . . Court to conclude that Denton knew his loan would hold a second position
care or to read the document in its entirety before signing it. Besides, FIB asserted, Denton was
not denied the opportunity to negotiate the terms and he admitted that he “studied” the note
before signing it.
CHAPTER 21: SECURED TRANSACTIONS 9
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
The court concluded that the loan contract was not unenforceable as a contract of
adhesion, and the state supreme court affirmed this conclusion. The higher court pointed out
that “[a] contract of adhesion is a contract whose terms are dictated by one contracting party to
another who has no voice in its formulation. Contracts of adhesion are unenforceable if not
within the reasonable expectations of the weaker party or if they are unduly oppressive,
unconscionable, or against public policy. . . .
“[I]nequality in bargaining power does not equate to unenforceability and not all
standardized contracts are unenforceable as adhesion contracts. Denton . . . was a so-
reasonable expectation.”
21–10A. LEGAL REASONING GROUP ACTIVITY—Security Interests
(a) The requirements that must be met for a creditor to have an enforceable security
interest are (1) the collateral must either (a) be in the possession of the secured party pursuant
others’ use of the property to secure interests in which the owners have no part.
(b) A security interest is not enforceable unless it attaches to the collateral. For
attachment to occur, under UCC 9–203 the debtor must have rights in the collateral, the secured
party must give something of value to the debtor, and the creditor must either possess the
collateral or there must be a security agreement that contains a description of the collateral and
collateral in a signed or authenticated document or in a separate document incorporated by
reference into a signed or authenticated document, no security interest can be recognized.
(c) As noted in the answer to the previous question, the debtor did not sign the
financing statement. Under the UCC, without a description of the collateral in a signed or
authenticated document or in a separate document incorporated by reference into a signed or
authenticated document, no security interest can exist.
