249
CHAPTER 29
SECURED TRANSACTIONS
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 29.1—QUESTIONS (PAGE 568)
1A. According to the court, which of the two security interests in the land on which the
manufactured home was situated had priority? As the court noted in its opinion, “There is no question
that Washington Mutual Bank has a valid and first lien on the real property.” When the Reynoldses first
mortgaged the property with Washington Mutual’s predecessor bank, the land served as collateral for
the loan. Although Citizens later acquired a security interest in the land when it acquired a mortgage on
the property, in the court proceedings Citizens was not contesting Washington Mutual’s prior rights to
the real property. Rather, after being served with the complaint, Citizens sought to perfect its security
interest in the mobile home by executing a title lien statement showing Citizens as a lien holder.
Because Washington Mutual had never perfected its security interest in the mobile home, and Citizens
had, Citizens’ security interest in the mobile home took priority over Washington Mutual’s.
2A. Suppose that the manufactured home was affixed to the land and regarded as real property. In
that situation, which of the two security interests would have taken priority? In this situation,
CASE 29.2—QUESTIONS (PAGE 574)
250 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
THE LEGAL ENVIRONMENT DIMENSION
How could Norwest and the bank have avoided the problem that arose in this case? The bank and
Norwest could not have done much differently. The Millers acted improperly after the fact—all
paperwork was in order and the bank and Norwest acted properly.”
THE ETHICAL DIMENSION
Why should the Millers be held responsible for a statement that Norwest made in the retail installment
contract, which said the boat had been accepted by the Millers? The Millers signed a contract that
CASE 29.3—QUESTIONS (PAGE 576)
THE ETHICAL DIMENSION
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.
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Onyx had argued that private auctions generally yield higher prices, and because Hicklin’s
car was sold at a private auction, the sale must have been commercially reasonable. Should the court
have ruled in favor of the creditor on this ground? Explain your answer. No. Even if private auctions
CHAPTER 29: SECURED TRANSACTIONS 251
1A. Perfection by filing
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.
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 qualify as one of the
PMSIs.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT
THE END OF THE CHAPTER
It should not matter if financing statements do not have the exact names of debtors 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.
CHAPTER 29: SECURED TRANSACTIONS 253
ANSWERS TO QUESTIONS AND CASE PROBLEMS
AT THE END OF THE CHAPTER
29-1A. Priorities
(Chapter 29—Pages 564–565 & 569)
A perfected secured party prevails over most third parties having claims to the same collateral of the
debtor. An exception, however, is a buyer who, in the ordinary course of business, “takes free of a
29-2A. Perfection of a security interest
(Chapter 29—Pages 557–559 & 562–564)
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]:
29-3A. QUESTION WITH SAMPLE ANSWER: The scope of a security interest
No. The bank will prevail because it held a properly perfected security interest in Edward’s entire
254 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
29-4A. Security interest
(Chapter 29—Pages 557–559)
A creditor’s chief concern on a debtor’s default is to obtain payment of the debt. To obtain this payment
from certain assets or collateral, a creditor must have priority over other creditors who may also have
29-5A. Creating a security interest
(Chapter 29—Pages 557–559)
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 that has been signed or otherwise authenticated by the
debtor. The court acknowledged in this case that “[n]o particular words of grant or ‘magic words’ are re-
quired to be included in a security agreement,” but “there must be some language reflecting the
debtor’s intent to grant a security interest. Accordingly, a financing statement which does not contain
any grant language by the debtor creating a security interest in the described collateral, but merely
identifies the collateral, cannot substitute for a security agreement.” Here, “[n]o language conveying a
security interest . . . is found in any of the documents” on which the bank attempted to establish a
security interest. “The financing statement, containing the only description of collateral, is not signed by
the DEBTOR and, in all likelihood, was never seen by him. What is left? Only boilerplate references in the
29–6A. Default
(Chapter 29—Pages 572 & 574)
A secured creditor has a variety of different of steps that it can take to satisfy a debt. Under the 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
256 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
creditor to deprive a debtor of the possession of the collateral for an unreasonable length of time and
not apply the property, or the proceeds from its sale, against the debt. The creditor must act in a
commercially reasonable manner and take steps to sell, lease, retain, or otherwise dispose of the
collateral.
In this problem, it does not appear that the bank has failed to proceed in a commercially
reasonable manner. The bank chose to retain the collateral and seek a judgment on the debt. The
amount that OAI owes the bank might be at issue—how does the value of the collateral apply against
the amount due on the note?—but the facts state that the debtor did not dispute the amount due. In
29-7A. CASE PROBLEM WITH SAMPLE ANSWER: Purchase-money security interest
The holder of the original, valid PMSI dominates, so Chase Bank gets the car. Certificate of title to the car
29-8A. A QUESTION OF ETHICS: Priorities
(a) The court found that Denton knew when he signed the note for Anderson’s loan that if
Anderson defaulted and FIB repossessed the collateral, the sale proceeds would be applied first to the
SBA loan. The court ruled in FIB’s favor. Denton appealed to the Montana Supreme Court, arguing in
part that FIB failed to disclose the impact of the SBA loan arrangements on the loan that he co-signed
and that this relieved him of the obligation to pay. 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 lien to the SBA loan.”
(b) Denton contended among other things that the note and security agreement constituted
a contract of adhesion because FIB prepared the note and the borrowers had no opportunity to
negotiate its terms, some of which were unconscionable. FIB countered in part that it was Denton’s duty
to review the note “with the prudence and care of a reasonable businessman” and that he cannot avoid
the consequences of the deal by failing to exercise that care or to read the document in its entirety
CHAPTER 29: SECURED TRANSACTIONS 257
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 sophisticated business person.
ANSWER TO VIDEO QUESTION NO. 29–9
Secured Transactions
(a) This chapter lists three requirements for creating a security interest. In the video, which
requirement does Laura assert has not been met? Laura is claiming that the first requirement for
creating a security interest has not been met. The first requirement is that either (a) the
collateral must be in the possession of the secured party in accordance with an agreement, or (b)
there must be a written or authenticated security agreement that describes the collateral subject
to the security interest and that is signed or authenticated by the debtor. Laura’s advertising
firm is obviously in possession of the editing equipment. Her claim is that the written and signed
loan document did not create a security agreement because it did not sufficiently describe the
collateral subject to the security interest. Under the UCC, a security agreement must contain a
description of the collateral that reasonably identifies it [UCC 9–108(c)]. Here, the loan
document did not describe the editing equipment but did incorporate by reference another
document that described the collateral for which the loan was made. Ray believes that the two
documents will be taken together to create a security interest. Ray is probably right. Most
courts will hold that multiple documents can create a security interest as long as the parties
clearly intended to create a security interest and the other requirements are met. If the two
documents were executed at the same time and Laura knew that she was creating a security
interest, then the fact that the property was described on a separate document will not normally
prevent a secured interest from arising.
ment? Because the collateral involved here is business equipment (the editing machine), the
bank should have perfected its interest in the goods by filing a financing statement with the
appropriate government official [UCC 9–301, 9–310(a), 9–313(a)]. Although perfection is not
258 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
required to create the security interest, perfection is necessary for the bank to protect its
interest (in the editing equipment) from the claims of third parties. (Note that if a consumer had
purchased equipment for personal or family use, by contrast, it would be a purchase-money
security interest [PMSI] in consumer goods; thus, it would have been perfected automatically at
the time of the sale.)
(c) If the bank exercises its self-help remedy to repossess Onyx’s editing equipment, does
Laura have any chance of getting it back? Explain. Yes, Laura still has the right to redeem the
can get the editing equipment back.
(d) Assume that the bank had a perfected security interest and repossessed the editing
equipment. Also assume that the purchase price (and the loan amount) for the equipment was
$100,000, of which Onyx has paid $65,000. Discuss the rights and duties of the bank with regard
to the collateral in this situation. Generally, the bank may sell, lease or otherwise dispose of the
collateral in any commercially reasonable manner [UCC 9–610]. A secured party, however, can
accept the collateral in full or partial satisfaction of the debt only if the debtor consents to an
acceptance [UCC 9–620]. In this situation, Laura would probably not consent to the bank’s
retention of the editing equipment in full or partial satisfaction of the debt (because the
equipment is worth much more than what is owed). If this had been a PMSI in consumer goods
(instead of a PMSI in nonconsumer goods), the secured party would be compelled to sell the
editing equipment because the debtor has paid over 60 percent of the purchase price [UCC 9–
620(e)]. Because Onyx is a business firm and not a consumer under the UCC, it would have to ask
the court for an order requiring the bank to sell the equipment and return any surplus (less
price that Onyx still owed to the bank, which is $35,000, equals the amount of surplus, or
$60,000.)
29-10A. SPECIAL CASE ANALYSIS: Security interests
Case No. 29.1
Citizens National Bank of Jessamine County v. Washington Mutual Bank
Court of Appeals of Kentucky, 2010.
309 S.W.3d 792.
CHAPTER 29: SECURED TRANSACTIONS 259
(a) Issue: This case involved conflicting security interests in the same collateral. What was
the collateral, and why was it difficult to decide which creditor’s security interest took priority? In this
case, two creditors had security interests in a mobile home, which was not affixed to the land on which
it was located. While it was clear that Washington Mutual Bank’s security interest in the parcel of land
on which the mobile home sat had arisen and been perfected before Citizens National Bank’s took a
security interest in the land, it was unclear who had rights in the mobile home. The mobile home had
not been mentioned in the deeds to the property or in the mortgage notes that gave the respective
(b) Rule of Law: What did the court have to decide before determining which rule
governing priorities applied to the conflicting security interests in this case? In order to determine which
of the rules governing priorities applied to this issue, the court had to decide (1) whether the mobile
home was real or personal property; and (2) whether either of the two creditors had perfected its
security interest in the mobile home.
(c) Applying the Rule of Law: The court decided that one party had perfected its security
interest in the collateral and the other had not. How did this decision affect the application of the rule of
law? The court held that Citizens National Bank had perfected its security interest in the mobile home by
securing a title lien statement listing its name as a lien holder. Washington Mutual Bank had not done
this, and therefore its security interest was unperfected. When it was clear evident the conflict was be-
tween a perfected security interest and an unperfected security interest, it was clear how the rule of law
(that perfected security interests take priority over unperfected security interests) applied to the
dispute.
(d) Conclusion: In which party’s favor did the court rule? Explain your answer. The court