Sample Short Essay Questions
1. Debtor owed First Bank $10,000, secured by a security interest in all of the Debtor's equipment (now owned and after-acquired). First Bank duly perfected its security interest by filing. Subsequently, Debtor borrowed $25,000 from Finance Co., which also took and perfected a security interest in all of the Debtor's equipment (now owned and after-acquired). When Debtor's loan from First Bank came due, Debtor borrowed $25,000 from Second Bank. Debtor used $10,000 of the loan proceeds to pay off First Bank, and used the rest of the loan to pay its taxes and its payroll. Contemporaneously with this loan, Debtor granted Second Bank a security interest in all of its equipment (now owned and after-acquired), and Second Bank perfected this security interest by filing. One month later, Debtor defaulted to both Finance Co. and Second Bank. Debtor still owes each $25,000. All of Debtor's equipment is sold and generates $25,000. How should the $25,000 be distributed, and why?
2. Payment Protection Systems, Inc. manufactures and markets a device (known as “On Time”) that is a fully electronic starter interruption system. The On Time device, which uses microprocessor technology, is marketed to car dealers. Upon selling a car to an installment purchaser, the dealer can attach the On Time device to the car. The device will warn the occupant when an installment payment on the vehicle is about to be due. If the installment payment is overdue, the On Time device disables the starting of the car, preventing the car from being driven. Your client, Easy Ed’s Auto Sales, wants to use the On Time device, but has asked for your advice regarding the legality of doing so. Does Article 9 permit a secured party such as Easy Ed’s to use the On Time device? What advice would you give Easy Ed’s?
3. Bank is considering a $200,000 loan to Fisk, a local entrepreneur. The loan would be secured by Fisk’s equipment, inventory, and accounts (including after-acquired). Fisk wants to borrow the money no later than December 15, 2003. On November 30, 2003, Bank conducts a search of the UCC records in the Secretary of State’s office. This search reveals that on December 20, 1998, Finance Company filed a financing statement covering Fisk’s “inventory.” After inquiring of Finance Company, Bank discovers that Fisk owes Finance Company $2,000 and that Finance Company holds a security interest in 150 “Weed-Whacker” trimmers (Fisk sells them door-to-door using college students as salespersons). Finance Company’s security agreement with Fisk does not contain a future advances clause. What advice would you give to Bank regarding the steps they could or should take in making the loan to Fisk and documenting the transaction?
4. Bank has a valid security interest in all of the personal property of Computer City, a dealer in computers and other electronic devices. Bank’s security interest is perfected by a proper UCC-1 financing statement covering “all of Debtor’s personal property.” Last week, Computer City sold a $10,000 TV set on credit to Homer. Homer signed a credit contract which did not require Homer to make monthly payments, but obligated Homer to pay for the TV set in full two years following the date of the contract. Homer took the TV home and placed it in his living room.
Just today, Computer City assigned its rights under its contract with Homer. Computer City assigned these rights to Davis, who paid Computer City $9,800. Davis took possession of the contract. As between Bank and Davis, who has first priority with respect to the right to payment under the contract with Homer? Explain. [Note carefully: If you feel that you need additional information to answer the question, explain what additional information you would need and how it would affect your answer.]
5. Bubba Charles is a loan officer for Putnam County Bank (PCB). In 2010, PCB loaned $100,000 to his former high school classmate, Tori Reading, on an unsecured basis (Bubba approved making the loan). When Reading borrowed this money from PCB, her loan application indicated that she owned a 10-carat diamond pendant, in which Bank of the West held a security interest to secure an unpaid debt of $1.5 million. Reading is currently in default in repayment of this loan to PCB.
Yesterday, Bubba was doing an informal search of the UCC records on the Missouri Secretary of State's website with regard to a proposed loan to another customer. Out of curiosity, Bubba did a quick computer search for prior filings under the name "Tori Reading." The search indicated no UCC-1 filings on record against Tori Reading. [You may assume that her correct legal name is "Tori Reading," that Bubba conducted his search using her correct legal name, and that the filing office's search logic returns only exact matches.]
Bubba then called Tori Reading. She confirmed that she still owns the pendant, which she keeps in a locked safe in her home office. She also confirmed that Bank of the West still holds a security interest in the pendant to secure a $1.5 million debt. [You may assume that Tori's statements are TRUE.]
Sensing an opportunity to secure PCB's previously unsecured debt, Bubba said: "Putnam County Bank will extend the due date of your loan by another six months if you will sign a security agreement granting us a security interest in your diamond pendant." Tori Reading agreed, and signed a security agreement granting PCB a security interest in the pendant. PCB then filed a financing statement covering the pendant in the Missouri Secretary of State's office.
It is possible that Bank of the West could have a perfected security interest in Tori Reading's diamond pendant, even though Bubba's search indicated no financing statements on file against Tori Reading. List six (6) different ways this could be possible. [If you can think of more than six, you can keep listing them: you can earn "extra credit" if you come up with more than six correct answers.]
6. Royce Barondes (a resident of Missouri) owns and operates Royce Rolls Motors as a sole proprietorship. All of the inventory of Royce Rolls Motors is financed through Boone County National Bank (BCNB), which has a security interest in all of the dealership's present and after-acquired inventory. BCNB filed a UCC-1 financing statement covering the inventory in the Missouri Secretary of State's office in 2007, which identified the debtor as "Royce Barondes."
On October 1, 2009, Royce Barondes purchased an Aston Martin V8 Vantage Roadster from Luxury Cars, LLC ("Luxury Cars"). He paid $75,000 in cash, and he signed a contract to pay the remaining $75,000 to Luxury Cars in 72 monthly installments, with interest. Under the contract, Luxury Cars retained a security interest in the Aston Martin.
On October 4, 2009, Luxury Cars assigned the contract to Columbia Auto Finance (CAF), which immediately applied to have a certificate of title issued for the Aston Martin, with CAF's lien noted on the title certificate. The title certificate for the Aston Martin was issued (properly showing CAF's lien) on October 20, 2009, and the certificate was returned to CAF (which still holds the title certificate).
After driving the Aston Martin for 10 months, Royce Barondes got tired of it and placed it on the sales lot at Royce Rolls Motors. On November 1, 2010, Chris Wells (Wells) purchased the Aston Martin from Royce Rolls Motors, paying $125,000 in cash. Royce Barondes did not inform Wells (and Wells did not know) that CAF claimed a security interest in the Aston Martin. Further, CAF did not know of, or consent to, the sale to Wells.
Also on November 1, 2010, Royce Barondes missed a second consecutive monthly payment to CAF. CAF immediately declared a default, accelerated the balance due under the contract, and filed a lawsuit against Royce Barondes to collect the remaining balance. Upon learning of the sale of the Aston Martin to Wells, CAF also filed a replevin action against Wells, seeking possession of the Aston Martin. Wells immediately moved to dismiss the complaint for failure to state a valid claim.
You are the judge in CAF v. Wells. Prepare an opinion in which you rule on the motion to dismiss filed by Wells. Your opinion should describe the arguments that CAF and Wells will make, and should explain on what basis you are granting or denying the motion.
7. Quality Auto Care, Inc. (Quality) has operated a garage and auto repair shop since 1990. Last year, Quality fired Jones, one of its mechanics. Jones subsequently brought a sexual harassment suit against Quality, obtaining a judgment in the amount of $200,000.
Quality's repair business had been picking up recently, and so on June 1, Quality approached Premier Bank about obtaining a loan to add two additional service bays. Unaware of the judgment entered against Quality, Premier Bank agreed to make Quality a $200,000 loan, to be secured by a security interest in at least $300,000 worth of Quality's equipment. Quality agreed to provide an itemized list of collateral to be identified in the security agreement. In the meantime, with Quality's consent, Premier Bank filed a financing statement covering Quality's equipment (this UCC-1 was also filed on June 1). Quality and Premier Bank agreed that the loan would be advanced and the security agreement would be signed at Premier Bank's offices at 10:00 a.m. on June 5, as long as Quality had prepared its itemized list of equipment that would serve as collateral. During the next few days, Quality's president worked diligently to compile the itemized list of collateral.
On June 3, Jones was drinking in a local bar and overheard one of Quality's mechanics talking about the proposed loan from Premier Bank and Quality's plan to use the loan proceeds to expand the business. Irate because her judgment remained unpaid, Jones went to the county sheriff to arrange for the sheriff to levy on all of Quality's equipment.
On the morning of June 5, Quality's president left the garage at 9:00 a.m. to go to Premier Bank for the scheduled 10:00 a.m. "closing" (the funding of the loan and the execution of the loan documents). Five minutes after Quality's president left for the bank, Jones and the sheriff arrived at Quality's garage and the sheriff levied on all of Quality's equipment. Shortly after the levy took place, and unknown to either Premier Bank or Quality, Premier Bank actually made the $200,000 loan to Quality, and Quality signed a security agreement containing an itemized list of the equipment serving as the collateral. Each item of collateral on the list was an item that had been seized by the sheriff only a few minutes earlier.
Upon returning to the garage, the president of Quality learned of the sheriff's seizure of the garage equipment. The next day, Quality filed a Chapter 11 bankruptcy petition. [Recall that in a Chapter 11 case, the debtor-in-possession can exercise the avoiding powers that a trustee in a Chapter 7 case could exercise.]
Can Quality, as a Chapter 11 debtor-in-possession, avoid (a) the security interest of Premier Bank or (b) the judgment lien of Jones? If so, what avoiding power(s) would apply? Explain.
8. Henning owns a warehouse storage business. On February 1, 2008, Firstbank took a security interest in all of Henning's equipment, including after-acquired equipment, and properly perfected it by filing a financing statement on February 2, 2008.
In September 2009, Henning saw an advertisement for the new Mitsubishi Caterpillar T9500 forklift. Henning went to a local dealer, Litton Equipment (Litton), where he learned that the sale price of the forklift was $80,000. Henning was concerned that this price was too high, although he felt that the price might be worth it if the forklift would increase the productivity of his warehouse by the percentages implied in the advertisement. Finally, Litton and Henning struck the following deal: Litton would let Henning test the forklift for a period of 30 days. At the end of the 30-day period, Henning could return the forklift to Litton "no questions asked," or Henning could sign a contract to buy it for the full $80,000 cash price (with Litton agreeing to finance that purchase).
On October 1, 2009, Litton delivered the forklift to Henning's warehouse. Henning began testing the forklift in his operations, and after three weeks, concluded that it was as good as advertised, so he called Litton and said, "I'll take it." On October 23, 2009, Henning signed an installment contract under which he agreed to pay for the forklift in 60 monthly installments. Under the contract, Litton retained title to the forklift until Henning completed making his monthly payments.
On November 10, 2009 (41 days after Litton delivered the saw to Henning's warehouse), Litton filed a financing statement covering the forklift in the appropriate filing office.
In December 2009, Henning defaulted to Firstbank, which has repossessed the forklift and plans to dispose of it in a private sale. If Firstbank's foreclosure sale is commercially reasonable in all respects, as required by Article 9, what effect will that sale have on Litton's security interest in the forklift? Explain.