Commercial Law

Your client, a bank, lent a borrower money secured by certain accounts receivable. The borrower has stopped making the payments on that obligation, and the client has initiated collection on the collateral as permitted by the security agreement. Another lender has now come forward, claiming that they have a prior security interest on the accounts receivable and should be paid before your client from any money collected from the persons obligated to pay the accounts receivable. Which of the following legal topics is the most likely to affect whether the client can collect what is owed on its promissory note with priority over the other lender? Select one.

• Default and enforcement.

• Deficiency.

• Filing

• Statute of frauds

Answer explanation

The answer is (c), filing. The key here is whether the other lender has filed a financing statement ahead of the client which would give the other lender priority. The only way to perfect a security interest in accounts is by filing, and the first to file or perfect would have priority. See U.C.C. §§ 9-310(a), 9-322(a)(1).

You are representing a business client who borrowed money from a bank. The client has granted the bank a security interest in certain of its assets, although the client does not recall which assets and has not yet provided you with any of the documentation. The client¶s business has recently struggled, and the client has missed a payment on its debt to the bank. The client wants to know what possible Article 9 outcomes could occur if the client fails to remedy the missed payment or fails to make further payments. Which of the following legal topics are the most important for you to determine, research, or consider before advising the client? Select two.

• Attachment (Part 2 of Article 9)

• Perfection (Part 3 of Article 9).

• Priority (Part 3 of Article 9).

• Rights of a Bank (Part 3 of Article 9)

• Default (Part 6 of Article 9).

Answer explanation

The best answers are (a) and (g). We donಬt know what the bank has a security interest in, so attachment is the first thing to consider. The next most important thing to consider is what rights the bank has on default, which the clientಬs missed payment almost certainly is. B-E donಬt matter (at least as much as the others) for this question because they are third party matters; this question is only asking about rights a secured party has against a debtor.

Your law firm encourages you to take on pro bono cases. Recently, you agreed to take on a pro bono case through your local bar¶s volunteer lawyers program in which you represent a person who bought a used car on credit from the dealer. The following is an excerpt from your notes from the initial interview with the client: Notes from the Initial Interview When the client purchased the car, the dealer gave the client a clean certificate of title for the car without any liens recorded on it. The dealer filed a financing statement against the client and sent the client a copy. The client struggled financially and ultimately borrowed money from a payday lender on a so-called ³motor vehicle title loan.´The payday lender took a security interest in the car and recorded its security interest on the car¶s certificate of title. The client gave you a copy of the debt contract it signed with the used car dealer. The contract provides that the client grants the dealer a security interest in the car. The contract also prohibits the client from granting other security interests in the car. Your jurisdiction (Texas) has the following statutes: Texas Transportation Code Sec. 501.111 (Certificate of Title Act): Except as provided by UCC Sec. 9-311(d), a person may perfect a security interest in a motor vehicle that is the subject of a sale only by recording the security interest on the title ... Texas UCC Sec. 9-311(d): During any period in which a vehicle subject to the Certificate of Title Act is inventory held for sale or lease by a person, Texas Transportation Code Sec. 501.111 does not apply and a security interest may only be perfected in such inventory under the rules of Article 9. Texas UCC Sec. 9-401(a): A secured party may not prevent a debtor from granting a security interest to another secured party. The other rules of Article 9 also apply. Which of the following is an accurate application of the above laws to the facts? Select one.

• The payday lender has priority over the used car dealer by reason of the rules in Article 9 governing priorities among conflicting security interests in the same collateral where one secured party has a perfected security interest and the other has an unperfected security interest

• The used car dealer has priority over the payday lender by reason of the rules in Article 9 governing priorities among conflicting security interests in the same collateral where one secured party has a perfected security interest and the other has an unperfected security interest.

• The used car dealer has priority over the payday lender by reason of the rules in Article 9 governing priorities among conflicting security interests in the same collateral where both secured parties have perfected security interests.

• The used car dealer has priority over the payday lender by reason of the contractual block on the client granting a security interest to the payday lender

Answer explanation

(a) is correct. The used car dealer did not perfect because it did not record its lien on the certificate of title as required by Section 501.111. UCC Sec. 9-311(d) and the fact about the dealer filing a financing statement are just distractors (the financing statement is ineffective to perfect in a car because 9-311(d) does not apply here (it would only apply if the used car dealer granted a security interest in its vehicle inventory to a lender, allowing that lender to file to perfect)). Under 9-401(a), the contractual block in the used car dealerಬs documents does not block the later security interest by the debtor. The payday lender did perfect by recording its lien on the title, and under Section 9-322(a)(2), a perfected security interest has priority over an unperfected one.

Bo Cars, Inc. ³Cars´ is a Texas company that sells used cars. On January 1, 2018, Cars received a $1,000,000 loan from Baby Bank. To secure the loan, Cars signed a security agreement that granted Baby Bank a security interest in all of the following, whether then owned or later acquired: inventory, equipment, and accounts. On the same day, Baby Bank filed a proper financing statement describing the collateral as ³all inventory and other assets.´Cars keeps its only operating account at Happy Bank. Baby Bank, Happy Bank, and Cars have entered into a signed contract indicating that Happy Bank will comply with instructions by Baby Bank regarding the disposition of funds in the deposit account without further consent by Cars. As of the date of this exam, does Baby Bank have a perfected security interest in Cars¶operating account?

• Yes, because it has filed a financing statement

• Yes, because it has control.

• No, because perfection fails.

• No, because attachment fails.

Answer explanation

(d). The security agreement does not cover deposit accounts, so there is no attachment.

Bo Cars, Inc. ³Cars´ is a Texas company that sells used cars. On January 1, 2022, Cars received a $1,000,000 loan from Baby Bank. To secure the loan, Cars signed a security agreement that granted Baby Bank a security interest in all of the following, whether then owned or later acquired: inventory, equipment, and deposit accounts. On the same day, Baby Bank filed a proper financing statement describing the collateral as ³all inventory and other assets.´On March 1, 2023, Cars changed its name to Big Lifters, Inc., which is different enough that a search for financing statements under the new name would not find a filing under the old name. On May 15, 2023, Big Lifters, Inc. acquired a Dodge car for its inventory. Baby Bank has not made any changes to its financing statement. Which of the following is true?

• Baby Bank has a perfected security interest in the Dodge.

• Baby Bank has an unperfected security interest in the Dodge

• Baby Bank has no claim to the Dodge.

• Baby Bank has a perfected security interest in the Dodge but would not have priority over secured parties that filed after Baby Bank but before 2023.

Answer explanation

(a). The collateral was acquired within four months after the name change, so the bank continues to have a perfected SI with priority over later SPs.

Bo Cars, Inc. ³Cars´ is a Texas company that sells used cars. On January 1, 2022, Cars received a $1,000,000 loan from Baby Bank. To secure the loan, Cars signed a security agreement that granted Baby Bank a security interest in all of the following, whether then owned or later acquired: inventory, equipment, and deposit accounts. On the same day, Baby Bank filed a proper financing statement describing the collateral as ³all inventory and other assets.´In addition, Senile Bank filed a proper financing statement against Cars on March 2, 2021, covering ³all assets.´On March 3, 2022, Senile Bank made a $50,000 loan to Cars, and Cars signed a security agreement granting Senile Bank a security interest in ³all equipment and all other assets.´Which of the following is most accurate?

• Baby Bank has priority in equipment; Senile Bank has priority in inventory.

• Senile Bank has priority in equipment; Baby Bank has priority in inventory.

• Baby Bank has priority in equipment and inventory.

• Senile Bank has no claim to Carsಬequipment and inventory

Answer explanation

(b) Senile was first to file and has priority in anything that later attached. The only security interest to attach was in equipment.

Bo Cars, Inc. ³Cars´ is a Texas company that sells used cars. On January 1, 2022, Cars received a $1,000,000 loan from Baby Bank. To secure the loan, Cars signed a security agreement that granted Baby Bank a security interest in all of the following, whether then owned or later acquired: inventory, equipment, and deposit accounts. On the same day, Baby Bank filed a proper financing statement describing the collateral as ³all inventory and other assets.´On April 21, 2023, Neon Bank made a $5,000 loan to Cars, the proceeds of which Cars used to buy a Ford car to put on its lot for sale. The same day, to secure the loan, Cars signed a security agreement granting Neon Bank a security interest in the Ford and Neon Bank filed a proper financing statement. The Ford was delivered to Cars on April 22, 2023. Neon Bank took no other action. Which of the following is true?

• Baby Bank does not have a perfected security interest in the Ford.

• Neon Bank does not have a perfected security interest in the Ford.

• Baby Bank has priority in the Ford.

• Neon Bank has priority in the Ford.

Answer explanation

(c) PMSI notice must be received by Baby Bank prior to delivery in order for Neon to take priority

Bo Cars, Inc. ³Cars´ is a Texas company that sells used cars. On January 1, 2018, Cars received a $1,000,000 loan from Baby Bank. To secure the loan, Cars signed a security agreement that granted Baby Bank a security interest in all of the following, whether then owned or later acquired: inventory, equipment, accounts, and deposit accounts. On the same day, Baby Bank filed a proper financing statement describing the collateral as ³all inventory and other assets.´Cars keeps its only operating account at Happy Bank. Baby Bank, Happy Bank, and Cars have entered into a signed contract indicating that Happy Bank will comply with instructions by Baby Bank regarding the disposition of funds in the deposit account without further consent by Cars. On September 1, 2023, Cars sold a car to a business customer and issued an invoice to the customer for $5,000, with a requirement that the invoice be paid within 120 days. The customer has not yet paid. As of the date of this exam, does Baby Bank have a perfected security interest in Cars¶right to be paid by the customer?

• Yes, because it has filed a financing statement.

• Yes, because it has control.

• No, because perfection fails.

• No, because attachment fails.

Answer explanation

(c). The filing lapsed earlier this year.

Bo Cars, Inc. ³Cars´ is a Texas company that sells used cars. On January 1, 2022, Cars received a $1,000,000 loan from Baby Bank. To secure the loan, Cars signed a security agreement that granted Baby Bank a security interest in all of the following, whether then owned or later acquired: inventory, equipment, and deposit accounts. On the same day, Baby Bank filed a proper financing statement describing the collateral as ³all inventory and other assets.´On April 21, 2023, Silly Bank made a $1,000 loan to Cars, the proceeds of which Cars used to buy a forklift that Cars used to move inventory around its lot. The same day, to secure the loan, Cars signed a security agreement granting Silly Bank a security interest in the forklift. The forklift was delivered to Cars on April 22, 2023. On May 1, 2023, Silly Bank filed a proper financing statement. Which of the following is true?

• Baby Bank does not have a perfected security interest in the forklift.

• Silly Bank does not have a perfected security interest in the forklift.

• Baby Bank has priority in the forklift.

• Silly Bank has priority in the forklift

Answer explanation

(d). PMSI in equipment. As long as the SP files w/in 20 days (which Silly did), it takes priority.

A construction company finances its purchase of a crane from a crane dealer and gives the dealer a security interest in the crane to secure the loan. The construction company is organized in Delaware. The crane is located in Texas. The dealer files a financing statement against the company, describing the crane as collateral, with the Texas Secretary of State. A year later, the construction company is struggling and desires to sell the crane. A buyer with no knowledge of any of the foregoing buys the crane and puts the crane on its property. After the buyer¶s purchase, is the crane encumbered by the dealer¶s security interest?

• No, because the buyer is likely a buyer in ordinary course of business.

• No, because the buyer purchased the crane prior to perfection by the dealer.

• Yes, because the buyer purchased the crane after perfection by the dealer.

• Yes, because a security interest continues in an asset notwithstanding the sale of the asset.

Answer explanation

b) This is a 9-317(b) buyer that receives delivery before perfection.