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1
CHAPTER 30
SECURED TRANSACTIONS
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
DIGITAL UPDATE—CRITICAL THINKING
How do online escrow services reduce Internet fraud? As more individuals demand to use
an escrow company for purchases on the Internet, fewer fraudulent transactions will occur.
Those who wish to engage in Internet fraud will find that they have a declining audience of
potential victims.
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 30.1—CRITICAL THINKING
ETHICAL
Under the circumstances, is it ethical for GRB to enforce its security interest in the ring
CASE 30.2—CRITICAL THINKING
LEGAL ENVIRONMENT
Why does UCC 9–332 permit transferees to take funds “free of a security interest”? How
did this provision work to benefit the parties in this case? The comments to UCC 9–332
explain that “broad protection for transferees helps to ensure that security interests in deposit
accounts do not impair the free flow of funds.” This encourages business and commercial deals
ETHICAL
Office Expo, Inc., a dealer in used furniture, was, like Tusa Office, a subsidiary of Tusa–
Expo Holdings. Tusa Office operated profitably but Office Expo did not. To bolster Office
Expo, funds were transferred from Tusa Office to Office Expo on a regular basis, which
caused problems for Tusa Office. Were these transfers unethical? Discuss. It can be
argued that the transfers from Tusa Office to Office Expo, with the goal of boosting the latter’s
flagging performance were not ethical. The question states that those transfers caused Tusa
CASE 30.3—LEGAL REASONING QUESTIONS
1A. What type of property was at the center of the dispute in this case? How did that
property become involved in the dispute? At the center of the dispute in this case were
shares of stock in Sparton Corporation. The shares were owned and pledged as collateral for
CHAPTER 30: SECURED TRANSACTIONS 3
2A. On what ground did the plaintiffs argue that the bank should not have been
granted a summary judgment? The debtors, Bradley Smith and the John J. Smith Revocable
Living Trust, filed a suit in a Michigan state court against the creditor, Firstbank Corporation,
3A. Why does collateral have to be disposed of in a commercially reasonable manner?
Is price alone enough to prove reasonableness? Why or why not? When a creditor
disposes of property that has served as the collateral for a debt, every aspect of the
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
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
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.
4 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
3A. Purchase-money security interests
The sound system, the kayak, and possibly the vehicle would qualify for purchase-money
4A. Retention on repossession
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
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
A financing statement that does not have the debtor’s exact name should still be
effective 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-
ANSWERS TO ISSUE SPOTTERS
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
CHAPTER 30: SECURED TRANSACTIONS 5
2A. Liberty Bank loans Michelle $5,000 to buy a car, which is used as collateral to
secure the loan. After repaying less than 50 percent of the loan, Michelle defaults. Liberty
could repossess and keep the car, but the bank does not want it. What are the
alternatives? When collateral is consumer goods with a PMSI, and the debtor has paid less
than 60 percent of the debt or the purchase price, the creditor can dispose of the collateral in a
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
30-1A. Priorities
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 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-
30-2A. Perfection of a security interest
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.
6 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
30-3A. The scope of a security interest
No. The bank will prevail because it held a properly perfected security interest in Edward’s entire
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
30–4A . SPOTLIGHT ON RADIO SHACK—Priorities
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
30–5A. Default
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 creditor to deprive a debtor of the possession of the
30–6A. Disposition of collateral
Yes, the sale was commercially reasonable. Once default has occurred and the secured party
has obtained possession of the collateral, the secured party can sell the collateral in any
CHAPTER 30: SECURED TRANSACTIONS 7
commercially reasonable manner and apply the proceeds toward satisfaction of the debt. The
secured party must notify the debtor ahead of time about the sale. Generally, a sale would be
commercially reasonable if it conforms to reasonable commercial practices among dealers in
the same type of property. The fact that a secured party could have obtained a greater price for
30-7A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Perfecting a security interest
Yes, these financing statements were sufficient to perfect the bank’s security interests in Tille’s
equipment. In most situations, perfection is accomplished by filing a financing statement with the
30–8A. Disposition of collateral
Yes, Barclays was entitled to collect even though it did not give Poynter ten days’ advance
notice of the sale. A loan agreement, like any contract, must be interpreted according to 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’
8 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
30–9A. Perfection of a security interest
Yes, the description in PHI’s financing statement was sufficient to perfect the creditor’s security
interest in the SURE payment. A financing statement must describe the collateral in which a
secured party has a security interest in order to provide public notice of the fact that certain
property of the debtor is subject to a security interest. The UCC permits broad, general
descriptions in a financing statement, such as “all assets.”
In this problem, G&K Farms ran a farm. G&K was insured under the federal
30-10A. 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
CHAPTER 30: SECURED TRANSACTIONS 9
(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 before signing it. Besides, FIB asserted, Denton was
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
30–11A. 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
(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
10 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
(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
