978-1305575080 Chapter 33 Solution Manual Part 1

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Chapter 33

SECURED TRANSACTIONS IN PERSONAL PROPERTY

RESTATEMENT

A secured transaction in personal property gives the creditor a security interest in the property. The property that is

pledged is called collateral and the creditor is known as the secured party. A special type of secured transaction is

the purchase money security interest (PMSI) which exists when the creditor finances the purchase or a third party

advances the funds for the purchase of property that becomes the collateral. The debtor owns the collateral and the

creditor has a lien on the collateral as security for the debt.

A security interest is created when there is an agreement, the creditor gives value (which can be a contemporaneous

exchange or given previously in the form of a loan) and the debtor has rights in the collateral. The secured

agreement must identify the parties, include a statement of intention to create a security interest, and a description of

the collateral. The collateral may be after-acquired property except in the case of consumer transactions when the

limit for after-acquired property is 20 days under Revised Article 9 from the time of the security agreement. The

collateral may also cover proceeds from the sale of collateral.

The basic types of collateral are: consumer goods which are used primarily for personal family or household use;

equipment which is used in business operations; inventory which are goods used primarily for resale; farm products

which include crops, livestock and supplies; and intangibles which include accounts, patents, receivables, and other

intangible personal property.

While the existence of a security interest provides a creditor with the right of repossession, perfection provides

creditors with priority positions. Perfection can occur through the creditor retaining possession of the collateral.

Perfection in a consumer purchase money security interest is automatic, and most states have a system for

perfection of security interests in automobiles through notation on vehicle registrations. A security interest can also

be perfected through the filing of a financing statement. A financing statement must include a description of the

collateral, the signature of the debtor, and the address of the secured party and debtor. A financing statement, when

filed in the appropriate location, results in perfection of the security interest. Under Revised Article 9, electronic filing

is now possible when the debtor authorizes it. The debtor’s signature is not required.

Perfection can be lost if the creditor surrenders possession, through lapse of time, or through removal to another

state. Special categories of automatic perfection exist including purchase money security interest in consumer goods

and the credit sale of inventory and equipment. Under Revised Article 9, perfection of accounts can be achieved by

control.

When there are two or more secured parties in the same collateral, there are rules applied for determining the priority

of the conflicting interests. The general rules for priority are that a secured party takes priority over an unsecured

party; secured parties are under a first in time priority rule; perfected secured party priorities are determined by a rule

of the first to perfect. Exceptions to the general priority rules include special priorities for inventory and purchasers of

consumer goods.

Upon default by the debtor, the secured creditor has the right to bring suit for payment or repossess the collateral.

The creditor can retain or sell the collateral. If the collateral is sold, the creditor must follow reasonable commercial

standards.

STUDENT LEARNING OUTCOMES

LO.1: Explain the requirements for creating a valid security interest.

LO.2: List the major types of collateral.

LO.3: Define perfection and explain its significance in secured transactions.

LO.4: Discuss the priorities of parties with conflicting interests in collateral when default occurs.

LO.5: State the rights of the parties on the debtor’s default.

INSTRUCTOR’S INSIGHTS

NOTE: The outline highlights the key points of Revised Article 9 UCC as well as the contrasts with the old version.

The book covers both old Article 9 and new Article 9.

Break the chapter down into five components – related Learning Outcomes are indicated in ( ):

1. What are secured transactions, why are they used, and how are they created?

Define secured transactions

Explain how a security interest is created (LO.1)

2. What is perfection, why is it important and how is it done?

Explain perfection by possession (LO.3)

Explain perfection for consumer goods (LO.3)

Explain perfection for health-care insurables (LO.3)

3. What are the rights of the parties in a secured transaction before default?

Cover statement of account

4. What are the priorities rules for creditors?

Explain what happens when conflicting security interests exist (LO.4)

5. What are the rights of parties after default?

Cover the creditor’s rights of possession, disposition, and redemption of collateral (LO.5)

CHAPTER OUTLINE

I. What are Secured Transactions, Why are They Used, and How are They Created?

A. Definitions

1. Make sure that the students know what type of security interests UCC Article 9 covers. Emphasize that

2. Parties – debtor and creditor (secured party)

3. Nature of creditor’s interest

4. Nature of debtor’s interest – a debtor has property rights in the collateral

B. Creation of a security interest

1. Agreement to create security interest

2. Security agreement

a. Writing (can be electronic under Revised Article 9) (record sufficient)

b. Signed by debtor (authentication under Revised Article 9 – need not be actual signature) (record)

3. Value

4. Rights in the collateral

a. Occurs when a person owns or has right to possession

b. The concept of attachment is very important. Note that under UCC § 9-203(1), a security interest is

C. Purchase money security interest (PMSI)

CASE BRIEF: In re Cunningham

489 B.R. 602, 80 UCC Rep. Serv. 2d 576 (D. Kan. 2013)

FACTS: Charles and Charity Cunningham (the Debtors) filed a joint Chapter 7 bankruptcy. The Debtors had

purchased two iPods, a camera, a computer, and other items in twelve separate consumer

transactions of consumer goods from Best Buy, N.A., a national retailer of consumer electronics

and related products and services. Some of Debtors’ purchases were made on credit provided by

Capital One.

The debtors signed a credit application which states, “you grant the Bank a purchase money

security interest in the goods purchased on your Account.” Furthermore, the application states in

that same section that the cardholder, the Debtors, agree to the terms and conditions of the

Cardholder Agreement.

The Application has this language buried in a 16–line paragraph in a small font. A magnifying glass

is necessary to find and read the language. The language appears in the ninth and tenth lines of

the paragraph. The Debtors agreed, in this fine print, to the terms and conditions of the Cardholder

Agreement. The Application indicates that the Cardholder Agreement would be sent to the Debtors

after the Application and initial purchase of consumer products on January 16, 2010. The

Cardholder Agreement is not signed. Buried in 41 numbered paragraphs in small print in the

Cardholder Agreement is language that refers to Debtors granting to Capital One “a purchase

money security interest in the goods purchased with your Card.”

The cardholder agreement states in paragraph 17 entitled “Security,” “you grant us a purchase

money security interest in the goods purchased with your Card.”

The twelve Best Buy receipts for the purchases all were signed by one of the Debtors, except for

one transaction. The Receipts contain basic information, such as the location of the Best Buy store,

a brief description of items purchased and the price of these items, and the date and time of the

sale. The Receipts also state “Payment Type: BBY CARD/HSBC.” The following language appears

below the place of signature:

KEEP YOUR RECEIPT!

I HAVE READ AND AGREE TO ALL RETURN AND REFUND POLICIES PRINTED ON

THE BACK OF THIS RECEIPT AND POSTED IN THE STORE. I HAVE RECEIVED

GOODS AND/OR SERVICES IN THE AMOUNT SHOWN ABOVE. BESTBUY.COM

RETURN AND EXCHANGE INFORMATION AND PRICE MATCH POLICY MAY VARY

SLIGHTLY FROM IN–STORE POLICY. PLEASE LOG ONTO WWW. BESTBUY. COM

FOR COMPLETE DETAILS.

The court did not have copies of the reverse side of the Receipts. Regardless, it appears that the

reverse side of the Receipts only contain language pertinent to the return and refund policies of

Best Buy. There is no reference on the Receipts to security interests, purchase money or

otherwise, retained by anyone. The Receipts also do not contain a reference to the Application or

the Cardholder Agreement. The Debtors requested a determination by the Court that Capital One

does not hold a security interest, purchase money or otherwise, in the goods they purchased at

Best Buy.

ISSUE: Can a security interest be cobbled together through a series of documents and a signed receipt?

REASONING: Revised Article 9 continues the requirement that a security agreement or financing statement

contain a description of the collateral that reasonably identifies the collateral. The use of categories

or types of collateral defined under the UCC (i.e., inventory) is still permitted. However, in consumer

transactions and a limited number of other situations, a description by type or class of collateral is

ineffective as to after-acquired property. Revised Article 9 permits “supergeneric” descriptions in the

financing statement such as “all assets” or “all personal property” but not in the security agreement.

The essence of the Debtors’ argument is that the description of the Consumer Goods in which

Capital One asserts a security interest is insufficient as it only refers to the type of collateral, and

Capital One, therefore, does not have a security interest in the Consumer Goods. Debtors argue

that any security interest that Capital One may have never attached to the Consumer Goods

because an insufficient description is fatal to the attachment of Capital One’s security interest to the

Consumer Goods. In response, Capital One argues that the description is sufficient if one combines

the language contained in the Application, the Receipts, and the Cardholder Agreement. The issue

before the Court is whether the description is sufficient to allow attachment and enforceability.

Aside from an insufficient description of the collateral, Debtors do not argue that Capital One did

not comply with the other prerequisites of a security interest with respect to enforceability and

attachment.

The Capital One receipts do not contain a reference to a purchase money security interest or any

other security interest. Capital One may not rely upon the description of the Consumer Goods

purchased on the Receipts because the Receipts are not a component of a security agreement

between the parties.

The security agreement is not enforceable in a consumer transaction because, excluding the

Receipts, the collateral is only described by type or class. Capital One does not hold a security

interest in the Consumer Goods.

D. Nature and classification of collateral

1. Classification of tangible collateral

c. Proceeds

i. Proceeds consist of what the debtor gets after disposing of the collateral

d. Electronic chattel paper – record stored electronically (Revised Article 9)

CASE BRIEF: In re Lull

386 B.R. 261, 65 UCC Rep. Serv. 2d 194 (D. Haw. 2008)

FACTS: On April 18, 2006, James W. Lull entered into a consignment agreement with Bowers and Merena

for auction of his Standing Liberty quarter-dollar collection. On April 21, 2006, Bowers and Merena

also agreed to loan to Lull $700,000, with the loan to be repaid from the auction proceeds.

The collection sold at auction for $1,119,750. After repayment of its loan to Lull and expenses of

sale, Bowers held net proceeds of $455,046.11. However, Gardiner, Kapaa 382, and Yamaguchi

went to Bowers and Merena and tried to claim the auction proceeds. Gardiner’s claim resulted

from a March 1, 2005, loan to Lull for $3.8 million. Lull was unable to repay the loan when it

became due, on February 28, 2006, so in July 2006, Gardiner agreed not to take legal action to

enforce the note after Lull executed a security agreement on July 19, 2006, which granted Gardiner

a security interest in “all personal property and other assets” of Lull and specifically listed all

commonly known categories of personal property, including goods, accounts, money, chattel paper,

general intangibles, instruments, and the proceeds thereof.

Gardiner recorded a financing statement in the Bureau of Conveyances of the State of Hawaii on

July 20, 2006. The financing statement described Gardiner’s collateral as, “All assets and all

personal property of the Debtor (including, without limitations, fixtures), whether now owned or

hereafter acquired or arising, and wherever located, and all proceeds and products thereof.”

Kapaa 382 made short-term loans to Lull on September 20, 2005, for $933,000; on December 5,

2005, for $471,566.82; on December 15, 2005, for $165,000; and on December 19, 2005, for

$400,000. On July 26, 2006, Lull executed a “Partial Settlement Agreement” in which he agreed,

among other things, to “convey and transfer to [Kapaa 382] title to the Coin Collection currently

consigned to Bowers and Merena Auctions, LLC, for auction scheduled to occur in August 2006, by

Bill of Sale[.]”

Kapaa 382 filed a financing statement with the California Secretary of State on August 22, 2006,

but the financing statement listed Kapaa 382 as both the debtor and the secured party and did not

mention Lull. On July 11, 2006, Lull executed an assignment of the proceeds of the coin auction to

Yamaguchi, for an unpaid promissory note, dated May 16, 2006, in the amount of $700,000. The

assignment was not recorded. On December 8, 2006, Lull filed a voluntary chapter 7 petition.

Claims in the bankruptcy case exceed $55 million, including unsecured claims of nearly $42 million.

The parties involved with the coins all claim priority.

ISSUES: Who has a security interest? What are the priorities of all of the Lull creditors?

REASONING: Because the coins were collector items they were a unique form of personal property and not used

as a medium of exchange. The parties could create a security interest in the coins and be entitled

to Article 9 perfection rights. Their value far exceeded their use as a medium of exchange and

some could no longer be used as a medium of exchange.

DISCUSSION POINTS: Have the students discuss the classifications of collateral and security interest using the In

re Lull case.

II. What is Perfection, Why is it Important and How is it Done?

A. Perfection of security interest

B. Perfection by creditor’s possession

C. Perfection of consumer goods purchase

D. Perfection for healthcare receivable – if consumer gives interest, no filing is necessary (Revised Article 9)

E. Automatic perfection

F. Temporary perfection – four-month period of perfection in new state where debtor relocates before creditor

has to file

G. Perfection by control

H. Perfection of motor vehicles – title registration, or filing a financing statement

I. Perfection by filing the financing statement

1. Content of the financing statement

CASE BRIEF: ProGrowth Bank, Inc. v. Wells Fargo Bank, N.A.

558 F. 3d 809 (8th Cir. 2008)

FACTS: On September 8, 2005, Wells Fargo (Defendants) and the Christopher Hanson Insurance Agency

entered into a Promissory Note and a Security Agreement, for one million dollars. As security for

the loan, Hanson assigned his interests in two separate annuity contracts, both issued by Fidelity &

Guaranty Life Insurance Company (“Fidelity & Guaranty”). The two annuity contracts were valued

at one million dollars, and they were identified as “L9E00015” and “L9E00016,” respectively.

That same day, Wells Fargo filed a financing statement with the Secretary of State of Missouri. The

financing statement identifies the “Debtor” as “Christopher J. Hanson,” and it describes the

collateral as follows:

All of Debtor’s right, title, and interest in and to, assets and rights of Debtor, wherever

located and whether now owned or hereafter acquired or arising, and all proceeds and

products in that certain Annuity Contract No.: LE900015 issued by Lincoln Benefit Life in

the name of Debtor….

The financing statement identifies the contract number as “LE900015” instead of “L9E00015,” and

it identifies the issuer as “Lincoln Benefit Life” instead of Fidelity & Guaranty. On September 16,

2005, Wells Fargo filed an additional financing statement. This statement correctly identified the

contract number, but once again mistakenly referred to the issuer of this contract as “Lincoln

Benefit Life” instead of Fidelity & Guaranty.

On February 9, 2006, Hanson obtained a loan from ProGrowth. As security for the loan, Hanson

assigned his interests in the Fidelity & Guaranty annuity contracts to ProGrowth. On February 14,

2006, ProGrowth filed two financing statements with the Secretary of State of Missouri. They

identify Hanson and the Agency as the debtor, and they accurately describe the collateral as:

“Fidelity and Guaranty Life Insurance Annuity Contracts Number L9E00015 and Number

L9E00016[.]” ProGrowth filed suit seeking a declaration that Wells Fargo and Global One were not

perfected secured creditors and it had priority to the annuity funds. The district court granted

summary judgment in favor of ProGrowth Bank, Inc. Wells Fargo and Global One appealed.