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Case: In ReRoser1
Facts: Robert Roser obtained a loan from Sovereign Bank which he promptly used to buy a car.
Nineteen days later, Sovereign filed a lien with the state of Colorado. The bank expected that,
with a perfected interest, it would have priority over everyone else.
Unknown to Sovereign Bank, Roser had declared bankruptcy only 12 days after he purchased
the car. Later, the bankruptcy trustee argued that he had priority over Sovereign because the
bankruptcy filing happened before Sovereign perfected its security interest. When the court found
for the trustee, Sovereign Bank appealed.
Issue: Did Sovereign Bank, a PMSI holder, obtain priority over the bankruptcy trustee?
Excerpts from Judge Hartz’s Decision:
The Bankruptcy Code gives the bankruptcy trustee the rights and powers of a person who
acquired a judicial lien on the debtor’s property at the time that the bankruptcy petition was
filed. In general, the trustee can avoid liens that are unperfected when the petition for
bankruptcy is filed. But in some circumstances a lien that is perfected after the bankruptcy filing
may nevertheless have priority.
The Bank presents a straightforward argument why its lien would have priority under Colorado
law over a lien of a judgment creditor who obtained judgment at the time Roser filed for
bankruptcy. Under the UCC:
If a person [1] files a financing statement [2] with respect to a purchase-money
security interest [3] before or within twenty days after the debtor receives
delivery of the collateral, the security interest takes priority over the rights of a
buyer, lessee, or lien creditor which arise between the time the security interest
attaches and the time of filing.
There is no doubt that the Bank satisfied the requirements of this section. The filing of a lien
constitutes the filing of a financing statement. Nor is there any dispute that the Bank held a
purchase-money security interest in Roser’s vehicle. Thus, because the Bank filed its lien within
20 days of Roser’s obtaining the vehicle, it contends that [the] UCC gives its lien a priority over
any rights in the vehicle--including the Trustee’s interest.
The Trustee’s arguments to the contrary are not persuasive. The Trustee cannot avoid the Bank’s
lien. We REVERSE the judgment of the district court and REMAND for further proceedings
consistent with this opinion.
Additional Case: Citizens Bank of Americus v. Federal Financial
Services, Inc.2
Facts: On December 5, Charles H. Logging (CHL) borrowed $225,000 from Citizens Bank to buy a
skidder, and signed a promissory note to repay the money along with a UCC-1 listing the skidder as
collateral. The bank filed the form the next day. CHL used the loan to pay other debts.
Two weeks later, Pioneer Machinery delivered the skidder for demonstration purposes only. At the
end of December, CHL decided to buy the machine. On December 30, CHL signed a contract of sale
subject to CHL’s obtaining insurance and also subject to Pioneer’s signature. On February 6, CHL
obtained its insurance, executed a note to Federal Financial, and signed a UCC-1 listing the skidder as
collateral. Federal Financial paid Pioneer and filed its financing statement on February 10.
1 613 F.3d 1240; 2010 U.S. App. LEXIS 14817, United States Court of Appeals for the Tenth Circuit,2010
2 509 S.E.2d 339 Georgia Court of Appeals, 1998
CHL defaulted and both Citizens Bank and Federal Financial sought the skidder.
The trial court found for Federal Financial and Citizens appealed.
Issue: Does the PMSI holder obtain priority?
Holding: Affirmed for Federal Financial. Federal Financial had a PMSI in the skidder, and filed
within the statutory period (currently 20 days, though in Georgia it was 15 days when this case was
decided). Citizens argues that Federal failed to timely file, because CHL had the skidder in December.
However, the seller still owned it. CHL was only a bailee. CHL became the owner only in February,
and Federal promptly perfected.
Question: What is so special about a PMSI?
Question: How does one obtain a PMSI?
Question: Are the goods in this case inventory or non-inventory?
Question: What is the difference?
Question: To obtain priority for a non-inventory PMSI, what must a company do?
Answer: A PMSI in non-inventory collateral takes priority over a conflicting security interest if
Question: Did Citizens have an earlier perfected PMSI?
Question: Was Federal Financial required to file within 20 days of the skidder’s December
delivery?
Answer: No. Federal Financial had to file within 20 days of the debtor’s taking possession. When
Default and Termination
Disposition of the Collateral
Once the secured party has obtained possession of the collateral, it has two choices. The secured party
may (1) dispose of the collateral or (2) retain the collateral as full satisfaction of the
debt.Acceptance of Collateral
Acceptance refers to a secured party’s retention of the collateral as full or partial satisfaction of the
debt. Partial satisfaction means that the debtor will still owe some deficiency to the secured party.
Proceeding to Judgment
Occasionally, the secured party will prefer to ignore its rights in the collateral and simply sue the
debtor. A secured party may sue the debtor for the full debt.3
Termination
Examine what happens when a debtor does not default, but pays the full debt. (You are forgiven if you
have lost track of the fact that things sometimes work out smoothly.) Once that happens, the secured
party must complete a termination statement, a document indicating that it no longer claims a
security interest in the collateral.4
Case: Chapa v. Traciers & Associates, Inc.5
Facts: Marissa Chapa defaulted on her car loan, so Ford Motor Credit Corp. hired Traciers &
Associates to repossess her white Ford Expedition. Traciers assigned its field manager, Paul
Chambers, to the task and gave him the vehicle’s tag number and address. Chambers staked out the
house, waiting for a chance to make his move.
One fateful morning, Chambers observed a woman drive the car out into the street and leave it running
while she ran back into the house. Chambers seized the moment. It only took him thirty seconds to
hook up his tow truck to the Ford and drive away. Chambers may have been quick but he was mistaken
about two things. First, he took the wrong car: This white Expedition belonged to Marissa’s brother
Carlos and his wife Maria. It was not in default. Second, their two children were in the backseat of the
towed vehicle.
When Maria emerged from the house and saw that the Expedition, with her children, was gone, she
naturally panicked and hysterically called 911. Meanwhile, on an adjacent street, Chambers noticed
that the Expedition's wheels were turning. When he stopped the tow truck to investigate, he discovered
the two Chapa children. Within minutes, Chambers returned the kids and the car to a hysterical Maria.
Carlos and Maria Chapa sued Traciers, Chambers, and FMCC for breach of the peace. The trial court
dismissed the case and the Chapas appealed.
Issue: Did Chambers commit a breach of the peace in repossessing the car?
Excerpts from Justice Guzman’s Decision:
After default, a secured party may take possession of the collateral without judicial process, if it
proceeds without breach of the peace. The Chapas argue that the act of taking children from the
possession of their mother which leaves her in a hysterical crying state, is clearly a breach of peace.
3 UCC §9-601(a).
4 49UCC §9-513.
5 267 S.W.3d 386 Texas Court of Appeals, 2008.
The expression “breach of the peace” as used in the Uniform Commercial Code connotes conduct that
incites or is likely to incite immediate public turbulence, or that leads to or is likely to lead to an
immediate loss of public order and tranquility. [The] secured creditor, in exercising its privilege to
enter upon premises of another to repossess collateral, may not perpetrate any action manifesting force
or violence, or naturally calculated to provide a breach of peace. Although actual violence is not
required to find breach of the peace, disturbance or violence must be reasonably likely, and not merely
a remote possibility. In addition, breach of the peace refers to conduct at, near, or incident to seizure of
property. Even in attempted repossession of a chattel off a street, parking lot, or unenclosed space, if
repossession is contested at actual time of and in immediate vicinity of attempted repossession, the
secured party must desist and pursue his remedy in court.
Here, there is no evidence that Chambers proceeded with the attempted repossession over an objection
communicated to him at, near, or incident to the seizure of the property. To the contrary, Chambers
immediately desisted repossession efforts and peaceably returned the vehicle and the children when he
learned of their presence. Moreover, Chambers actively avoided confrontation. By removing an
apparently unoccupied vehicle from a public street when the driver was not present, he reduced the
likelihood of violence or other public disturbance.
In sum, Chambers's conduct did not violate a duty imposed by section 9.609 of the Texas Business and
Commerce Code.
Question: Pursuant to the UCC, what is “breach of peace?”
Answer: Breach of peace connotes conduct that incites or is likely to incite immediate public
Question: What is default?
Question: What does the secured party have the right to do when the debtor defaults?
Multiple Choice Questions
1. CPA QUESTION Under the UCC Article 9, which of the following actions will best perfect a
security interest in a negotiable instrument against any other party?
(a) Filing a security agreement
(b) Taking possession of the instrument
(c) Perfecting by attachment
(d) Obtaining a duly executed financing statement
2. CPA QUESTION Jim’s birth certificate lists him as “James Brown Smith;” his driver’s license
identifies him as “Jim Smith;” but his business card reads “J.B. Smith” and his friends call him
Jimbo. How should the financing statement list this debtor’s name ?
(a) James Smith
(b) J.B. Smith
(c) Jim Smith
(d) James Brown Smith
3. CPA QUESTION Under the UCC Secured Transactions Article, perfection of a security interest by
a creditor provides added protection against other parties in the event the debtor does not pay its
debts. Which of the following parties is not affected by perfection of a security interest?
(a) Other prospective creditors of the debtor
(b) The trustee in a bankruptcy case
(c) A buyer in the ordinary course of business
(d) A subsequent personal injury judgment creditor
4. CPA QUESTION Mars, Inc., manufactures and sells VCRs on credit directly to wholesalers,
retailers, and consumers. Mars can perfect its security interest in the VCRs it sells without having
to file a financing statement or take possession of the VCRs if the sale is made to which of the
following:
(a) Retailers
(b) Wholesalers that sell to distributors for resale
(c) Consumers
(d) Wholesalers that sell to buyers in ordinary course of business
5. When Michelle, a student, buys a laptop, she pays an extra fee so that the computer arrives at her
door with the latest version of Microsoft Word pre-installed. Under Article 9, the word processing
program is considered:
(a) “goods”
(b) “services”
(c) “software”
(d) none of the above
Case Questions
1. Eugene Ables ran an excavation company. He borrowed $500,000 from the Highland Park State
Bank. Ables signed a note promising to repay the money and an agreement giving Highland a
security interest in all of his equipment, including after-acquired equipment. Several years later,
Ables agreed with Patricia Myers to purchase a Bantam Backhoe from her for $16,000, which he
would repay at the rate of $100 per month, while he used the machine. Ables later defaulted on his
note to Highland, and the bank attempted to take the backhoe. Myers and Ables contended that the
bank had no right to take the backhoe. Was the backhoe covered by Highland’s security interest?
Did Ables have sufficient rights in the backhoe for the bank’s security interest to attach?
Answer: Yes to both questions. The bank had a valid security interest in all of Able’s equipment,
including after-acquired equipment. After-acquired clauses are valid. The only question is
2. The Copper King Inn, Inc. had money problems. It borrowed $62,500 from two of its officers,
Noonan and Patterson, but that did not suffice to keep the inn going. So Noonan, on behalf of
Copper King, arranged for the inn to borrow $100,000 from Northwest Capital, an investment
company that worked closely with Noonan in other ventures. Copper King signed an agreement
giving Patterson, Noonan, and Northwest a security interest in the inn’s furniture and equipment.
But the financing statement that the parties filed made no mention of Northwest. Copper King went
bankrupt. Northwest attempted to seize assets, but other creditors objected. Is Northwest entitled
to Copper King’s furniture and equipment?
Answer: No. Northwest’s name was omitted from the financing statement. Minor omissions are
acceptable, but the court held that this was not minor. It is essential that any potential creditors be
3. Sears sold a lawn tractor to Cosmo Fiscante for $1,481. Fiscante paid with his personal credit card.
Sears kept a valid security interest in the lawnmower but did not perfect. Fiscante had the machine
delivered to his business, Trackers Raceway Park, the only place he ever used the machine. When
Fiscante was unable to meet his obligations, various creditors attempted to seize the lawnmower.
Sears argued that because it had a purchase money security interest (PMSI) in the lawnmower, its
interest had perfected automatically. Is Sears correct?
Answer: No. A PMSI in consumer goods perfects automatically. A consumer good is one that is
used primarily for personal, family, or household purposes. Many lawnmowers are consumer
4. The state of Kentucky filed a tax lien against Panbowl Energy, claiming unpaid taxes. Six months
later, Panbowl bought a powerful drill from Whayne Supply, making a down payment of $11,500
and signing a security agreement for the remaining debt of $220,000. Whayne perfected the next
day. Panbowl defaulted. Whayne sold the drill for $58,000, leaving a deficiency of just over
$100,000. The state filed suit, seeking the $58,000 proceeds. The trial court gave summary
judgment to the state and Whayne appealed. Who gets the $58,000?
Answer: It went to Whayne’s world. Taking the money from the taxpayer’s creditor Whayne
rather than the taxpayer Panbowl resulted in a windfall to the state. Whayne has a perfected PMSI
5. You Be the Judge: WRITING PROBLEM Dupont Feed bought and sold
agricultural products. Dupont borrowed $300,000 from Wells Fargo Bank and gave Wells Fargo a
security interest in all inventory, including after-acquired inventory. Wells Fargo perfected its
interest by filing on June 17, 1982. Later, Dupont borrowed $150,000 from the Rushville National
Bank and used the money to buy fertilizer. Dupont gave a PMSI to Rushville in the amount of
$150,000. Rushville filed its financing statement in February 1984 at the County Recorder’s office
—the wrong place to file a financing statement for inventory. Then Dupont took possession of the
fertilizer, and finally, in December 1984, Rushville filed correctly, with the Indiana Secretary of
State. Dupont defaulted on both loans. Rushville seized the fertilizer, and Wells Fargo sued,
claiming that it had perfected first. Rushville asserted that it had a PMSI, which took priority over
an earlier-filed security interest. Does Rushville’s PMSI take priority over Wells Fargo? (Go
slowly, the rules are very technical.) Argument for Rushville: It is black letter law that PMSIs
take priority over virtually everything, including interests perfected earlier. We are not fools at
Rushville: we would not loan $150,000 to buy inventory if our security interest in that inventory
was instantly inferior to someone else’s. Argument for Wells Fargo: A PMSI in inventory gets
priority only if the secured party perfects before the debtor receives the collateral. When Dupont
obtained the fertilizer, Rushville had not perfected, because it had filed in the wrong office. It only
perfected long after Dupont bought the inventory; thus, Rushville’s PMSI does not get priority.
Answer: Wells Fargo wins. The court ruled:
The exception to the “first to file or perfect” rule for purchase money security interests in inventory
is relevant in this case. Rushville claims that it had a valid purchase money security interest
In order to acquire priority, a purchase money secured creditor must satisfy each of these three
requirements. Because Rushville filed its financing statement covering [the] inventory with the
Discussion Questions
1. Collateral may change categories depending on its holder and how it is being used at the time of
default. Classify a refrigerator in the following circumstances:
(a) When sold by an appliance store;
(b) When used by a restaurateur in his business; and
(c) When installed in a homeowner’s kitchen.
2. ETHICS The Dannemans bought a Kodak copier worth over $40,000. Kodak arranged financing
by GECC and assigned its rights to that company. Although the Dannemans thought they had
purchased the copier on credit, the papers described the deal as a lease. The Dannemans had
constant problems with the machine and stopped making payments. GECC repossessed the
machine and, without notifying the Dannemans, sold it back to Kodak for $12,500, leaving a
deficiency of $39,927. GECC sued the Dannemans for that amount. The Dannemans argued that the
deal was not a lease but a sale on credit. Why does it matter whether the parties had a sale or a
lease? Is GECC entitled to its money? Finally, comment on the ethics. Why did the Dannemans not
understand the papers they had signed? Who is responsible for that? Are you satisfied with the
ethical conduct of the Dannemans? Kodak? GECC?
Answer: If the transaction is actually a sale with a security interest, Article 9 governs–and that is
precisely what the court held. The court granted the Danneman’s motion for summary judgment.
As to the ethics, one could argue that the Danneman’s are responsible for signing, but in reality, no
one other than a lawyer would recognize the document for what it was. The document was drafted
3. After a federal judge refused to dismiss criminal charges against him, Michael Reed took revenge
by electronically filing a UCC financing statement listing the judge, the prosecuting attorney, and
former Secretary of the Treasury Timothy Geithner as $3.4 million debtors. Reed himself was listed
as the secured party. The lien became part of the public record. When Reed was later prosecuted
for violating a statute intended to prevent harassment of public officials, he argued that he was
innocent because the financing statement listed no real or personal property as collateral – and
would never have succeeded in perfecting a claim. What should the judge rule?
Answer: Based on US v. Reed, 668 F.3d 978 (8th Cir. 2012). The judge ruled that Reed caused the
4. After reading this chapter, will your behavior as a consumer change? Are there any types of
transactions that you might be more inclined to avoid?
5. After reading this chapter, will your future behavior as a businessperson change? What specific
steps will you be most careful to take to protect your interests?
6. A perfected security interest is far from perfect. We examined several exceptions to normal
perfection rules involving BIOCs, consumer goods, and so on. Are the exceptions reasonable?
Should the UCC change to give the holder of a perfected interest absolute rights against absolutely
everyone else?
