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Which of the two methods for proving that a sale was commercially reasonable is likely more difficult to apply?
Showing conformity with the practices of “reputable dealers in the trade” conclusively establishes that a sale was
commercially reasonable. For this reason, secured parties often use that method to prove their compliance with the
UCC’s requirements. If this method is not used, a secured party must show that every aspect of a sale is “commercially
reasonable.” This requires a secured party to establish considerably more than that a fair price for the collateral was
obtained.
Suppose that Onyx argued that it acted in good faith when it sold Hicklin’s car. Would this establish that the sale
was commercially reasonable? No. UCC 1–304 provides that “every contract or duty within the Uniform Commercial
Code imposes an obligation of good faith in its performance and enforcement.” The court reasoned, “Good faith is a
bedrock minimum standard that all secured parties must satisfy. Article 9 goes beyond that, by imposing a higher stan–
dard—commercial reasonableness. A secured party’s failure to act in good faith may evidence a lack of commercial
reasonableness, but the converse is not necessarily true. That is, a showing of good faith in selling repossessed
collateral, without more, cannot establish the commercial reasonableness of the method, manner, time, place, and
other terms of that sale.”
Should a court’s scrutiny of the price paid for collateral be different when the purchaser is the secured party or
someone related to the secured party? Explain. Yes. When the party who acquires the collateral at a “commercially
reasonable sale” is the secured party or someone related to the secured party (or even a secondary obligor), there may
be no incentive to maximize the proceeds from the sale, as there might be if the debtor were selling the property. A
low price on a sale to such a party does not necessarily constitute noncompliance with the requirements of Article 9.
But, under UCC 9–615(f), the calculation of any deficiency is based not on the actual amount of the proceeds but on
the amount that would have been received in a commercially reasonable sale to someone other than those parties. A
low price on a sale to such a party does not necessarily constitute noncompliance with the requirements of Article 9.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 29.3
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,
debtors would be treated unfairly. Setting a higher bar establishes a more equitable legal standard and encourages
706 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 29.3
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 generally result in higher sales prices than
other methods, this would not prove that the specific auction in this case resulted in a higher price. A sale to the
highest bidder at a poorly publicized, sparsely attended, and inconveniently located auction would not likely result in a
reasonable price. A sale to the highest bidder at a highly publicized, well-attended auction run by a highly regarded
auctioneer in a convenient location would. The argument posited in this question does not indicate which type of
auction occurred. Without more, this would not establish commercial reasonableness.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases involving questions concerning a creditor’s actions on a debtor’s default include the following.
• New Holland Credit Co. v. Madison Creek LLC, 191 F.Supp.2d 695 (S.D.W.Va. 2002) (an unproved oral statement by
a secured creditor’s agent not to pursue a deficiency judgment if the debtor surrendered a wheel loader that served as
collateral for a loan did not waive the creditor’s right to seek the amount of a deficiency, when contract’s unambiguous
language required that all modifications be in writing and signed by both parties; there was a question, however, as to
whether the subsequent sale was commercially reasonable).
• Giles v. First Virginia Credit Services, Inc., 560 S.E.2d 557 (N.C.App. 2002) (a creditor had the right to 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
5. Noncash Proceeds
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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)].
ANSWER TO VIDEO QUESTION LTR. 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
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 expenses and attorneys’ fees). For example, if the equipment sold for
$85,000 and the expenses involved in the sale were $10,000, Onyx would be entitled to recover the surplus of $60,000
still owed to the bank, which is $35,000, equals the amount of surplus, or $60,000.)
6. Deficiency Judgment
7. Redemption Rights
9–623].
ANSWER TO VIDEO QUESTION LTR. 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 collateral after repossession. Under the UCC, at any
time before the bank sells or contracts to sell the collateral, or retains the collateral in satisfaction of the debt, the
debtor can exercise the right of redemption [UCC 9–623]. In other words, if Laura pays off the loan securing the editing
machine, along with any reasonable expenses and attorneys’ fees that the bank has incurred, she can get the editing
equipment back.
708 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
TEACHING SUGGESTIONS
1. An important point for students’ understanding of which rules apply in a given secured transaction is that the
method of perfection depends on the type of collateral. Emphasize that the UCC categorizes collateral according to the
2. From the discussion of security agreements and financing statements, students may misunderstand that although
these requirements.
3. The steps in insuring that a security interest was properly perfected might be outlined as follows:
(1) Classify the collateral.
(2) Determine whether the interest was a PMSI.
(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
(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 revised 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
2. What sort of description in a written security agreement might be insufficient to create a security interest? Descriptions
that have been held to be insufficient included an attempted security interest in “all of the debtor’s personal property now
owned and hereafter acquired.” Why would this description be considered insufficient to create a security interest? It is too
3. What is perfection? Perfection is the process by which a secured party protects his or her interest against some claims of
4. What are the methods of perfection and what determines which method is appropriate? Perfection may occur by filing, by
5. What determines the classification of collateral? The principal use to which property is put by a debtor determines its
6. How is an interest in proceeds perfected? A security interest in proceeds perfects automatically on perfection of the
7. What happens when a secured party and an unsecured party claim security interests in the same collateral? Secured
8. What happens when two secured parties claim security interests in the same collateral? The general rule of priority
710 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
priority, but if the first bank failed to perfect its interest, the second bank’s interest would have priority; if both failed to perfect,
priority would belong to the first to attach—that is, the first to advance money under a security agreement.) A purchase-money
security interest (PMSI) may prevail over a non-PMSI in after-acquired property, even if the non-PMSI was perfected first.
Generally, if the collateral is inventory, a perfected PMSI prevails over a previously perfected non-PMSI, provided that the PMSI
party perfects and gives the non-PMSI party written notice of his or her interest before the debtor takes possession of the newly
9. What happens when a secured party claims a security interest in collateral that has been sold by the debtor? Generally, a
security interest in collateral continues after the collateral is sold unless the secured party authorized a sale. Exceptions include:
(1) buyers in the ordinary course of business, who take goods free of any security interest created by a merchant in the
merchant’s inventory, even if the security interest is perfected and even if the buyer knows of it (a consumer, for instance, who
buys an stereo from a retailer takes the stereo free of any security interest, created by the retailer, in the retailer’s inventory);
(2) buyers of farm products, who are considered buyers in the ordinary course of business under the Food Security Act and may
take farm products free of any security interest, unless (a) the buyer receives notice of the security interest within a year before
the purchase; (b) the buyer fails to register with the secretary of state before the purchase, and the secured party has properly
perfected his or her interest centrally; or (c) the buyer receives notice from the secretary of state that the farm products being
10. What are a secured party’s rights on a debtor’s default? A secured party’s rights on a debtor’s default include obtaining
712 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ACTIVITY AND RESEARCH ASSIGNMENTS
1. A secured party can repossess collateral on a debtor’s default, unless the security agreement states otherwise, as long as
3. Ask a lender to discuss with the class what criteria the lender uses in deciding whether to lend to a particular borrower and
what, in practical terms, the lender does on debtors’ defaults in transactions involving different kinds of collateral.
4. Before sorting out priorities among creditors, ask students to read the applicable UCC provisions and attempt to sort out
the priorities themselves.
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 6: In September 2000, Rebel Rents, Inc., bought equipment from Snorkel International, Inc., to use as
inventory. Textron Financial Corp. financed the deal under a security interest in the equipment and its proceeds. On December
29, General Electric Capital Corp. (GECC) lent Rebel up to $25 million under a security interest in substantially all of Rebel’s
assets, including inventory and proceeds. On January 5, 2001, GECC filed its financing statement. Textron filed its statement on
The unrevised section of the UCC that the court applied in this case was UCC 9–312. The related section in the revised
Article 9 is UCC 9–324. In the pre-revision section, there was a twenty-day grace period to which the court refers. Students who
read the full opinion might be reminded that the twenty-day period was dropped in the revision.
For purposes of determining the perfection of a purchase-money security interest in inventory, when should a debtor
be considered to “receive possession” of goods delivered in stages, or goods that require assembly and testing? Usually, there is
4.
In September 2000, before Textron agreed to finance Rebel’s purchase of the Snorkel equipment, Snorkel filed a
financing statement covering its equipment “plus all proceeds derived therefrom.” Textron argued that it succeeded to Snorkel’s
interest when Textron agreed to finance the deal. If 4 Textron were subrogated to Snorkel’s rights, did Snorkel’s use of
“proceeds” in its financing statement include Rebel’s revenue from the leases? No, said the court, which discussed the question
at length. The definition of “proceeds” in the unrevised UCC 9–306(1) did not expressly include “rental income,” and the court
refused to construe the statute to impliedly include it. The court reasoned that the reference in the statute to “disposition of
collateral,” in relation to “proceeds,” covered only those goods for which there had been a “permanent or final conversion, not
a temporary use.” As the court adds, in revised Article 9, in UCC 9–102(64), the definition of “proceeds” was changed to include
“whatever is acquired upon the . . . lease . . . of collateral.”
Footnote 9: Hook & Motter, Inc., is an auto dealer in Ohio that does business as Dublin Auto Sales. Dublin Auto
granted a security interest in its inventory to Heartland Bank for a $300,000 line of credit. Heartland perfected its security
interest by filing. Dublin Auto used some of its credit to buy a 1997 Ford F-150 and a 1999 Jeep Cherokee. Dublin Auto sold the
F-150 to Joe and Michael Murphy, and the Jeep to Michael Laxton. National City Bank financed both purchases. Heartland
received none of the funds from the sales and consequently filed a suit in an Ohio state court against National City and others,
seeking a declaration that its security interest in the vehicles took priority. The court ruled in National City’s favor. Heartland
appealed. In Heartland Bank v. National City Bank, a state intermediate appellate court affirmed. Under UCC 9–320(a)—which
applied to the security interest in the vehicles in this case because a dealer held those vehicles as inventory for sale—
Heartland’s interest was extinguished on the sale of the vehicles to the Murphys and Laxton, who met the definition of buyers in
the ordinary course of business. Under the UCC “a buyer in the ordinary course of business takes free of a security interest
created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.”
The court in the Heartland case ruled that the UCC controls over other state law with respect to security interests in
motor vehicles held as inventory for sale by dealers. This is also made clear in Comment 4 to UCC 9-311, which states
Inventory Covered by Certificate of Title. Under [UCC 9-311(d) ], perfection of a security interest in the
inventory of a person in the business of selling goods of that kind is governed by the normal perfection rules, even if
Would it have affected the outcome in this case if the title certificates had been filed in a database that could be
accessed online? Explain. No. In fact, R.C. 4505.13(A)(2)—which the court relied on to establish that the UCC’s provisions take
precedence in the circumstances of this case—provides no exception for the “entry of a notation of the security interest into the
automated title processing system if a physical certificate of title for the motor vehicle has not been issued.”
714 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Motor vehicles can be moved easily from one jurisdiction to another. Is it likely that the result would have been
different if the Murphys or Laxton had purchased the vehicles in, say, Canada? Why or why not? No, assuming all of the other
facts in the case were the same. The same law would have applied to the other parties, and the buyers completing their
transaction in a different country would not have affected the interplay of the statutes among the other parties to this case.
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What is the floating lien concept? When collateral is disposed of, a security interest shifts automatically to the proceeds.
2. What are a secured party’s rights on a debtor’s default? On a debtor’s default, a secured party’s rights include obtaining
the collateral, accelerating the debt, and stopping all other credit (which occurs when, as is typical, the secured party is the
debtor’s principal source of credit). Repossession of Collateral. A secured party has a right to take possession of collateral on
default unless the security agreement states otherwise, as long as there is no breach of the peace. Otherwise the secured party
must use judicial process. State law other than the UCC determines what constitutes breach of the peace. Retention of
Collateral. After default and repossession, a secured party can retain the collateral. If the debtor has not renounced or
modified in writing his or her rights after default, the secured party must notify the debtor in writing of any proposal to retain
the collateral. With consumer goods, no other notice is necessary. In other cases, notice must be sent to any other secured
CHAPTER 29: SECURED TRANSACTIONS 715
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
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
3. Which of these purchases would qualify as a PMSI in consumer goods? The sound system, the kayak, and possibly
4. Suppose that after KDM Electronics repossesses the surround-sound system, the owner decides to keep the
716 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
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:
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
security interest. Just because a creditor might have made an error in naming the debtor should not prevent the
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.
ANSWERS TO QUESTIONS—
SPECIAL CASE ANALYSIS
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.
(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
banks their security interests in the property. Additionally, the mobile home, because it was not affixed to the land,
was classified as personal property (basically, movable property), not real property (land and everything attached to it).
CHAPTER 29: SECURED TRANSACTIONS 717