Secured Transactions


1.1 On July 1, Ed Owens visits the office of his friend Alexandra Fuller. Seeming a little embarrassed, he asks Alexandra, whom he knows to be fairly well-off, for a loan of $20,000. He assures her that he will be able to pay the money back with 7% interest within a year. “You know I wouldn’t normally ask for such a favor,” he explains, “but I’ve been hit with some large medical bills all of a sudden, and I’m a little low on cash right now.” When Alexandra shows some unwillingness to make such a hefty loan, Ed pulls out of his pocket an elegant gold pocket watch. He says, “As you can see, it bears the date 1842. I’ve been told I could sell it to a collector of antique watches at any time and get way more than the $20,000 for it, but I just can’t get myself to do that. A distant ancestor of mine bought it originally before the Civil War, and it’s been handed down from generation to generation in my family ever since. I have always planned on handing it down to my daughter Edie when the time comes. Here’s the deal: If you make the loan to me, I’ll let you have this watch with the understanding that you can hold onto it until I fully repay you.” Alexandra agrees to make the loan to Ed, provided he does put the watch into her possession on those terms. Ed signs a paper she quickly draws up stating that he agrees to pay Alexandra $20,000 plus 7% interest no later than June 30 of the following year. He hands the watch over to Alexandra, who quickly puts it in a locked drawer of her desk. She then gives Ed a check for $20,000, which he promptly cashes.

(a) Is this transaction between Ed and Alexandra governed by Article 9? If so, what is the obligation secured and what makes that obligation legally binding? What is the collateral? Who would be termed the debtor, the obligor, and the secured party with respect to the security interest created?

(b) Suppose that what Ed hands over to Alexandra in her office was not the watch itself but instead a writing signed by him and dated July 1 stating that he “hereby grants to Alexandra Fuller a security interest in one 1842 gold pocket watch, now owned by me, to secure my repayment of a loan being made by her to me on this date.” Would this change any of your answers to the questions set out in part (a) above?

(c) Finally, suppose that when Ed comes to Alexandra for the loan he does not himself own the watch, or anything else of comparable value, to give to her as collateral. He does, however, bring along his cousin and close friend John. It is John who owns and is now carrying with him a valuable antique watch. He states that in order to help his cousin out of his cash-flow problem, he, John, is willing to put the watch into Alexandra’s possession until Ed pays off any loan Alexandra makes to him. Alexandra takes the watch from John, has Ed sign the paper saying that he agrees to repay the loan and on what terms, and then gives the $20,000 check to Ed. Has an Article 9 security interest been created here? If not, why not? If so, how would you now answer all those questions from part (a)?

1.2 Winger and Bucks are next-door neighbors. One Friday, Winger borrows $300 in cash from Bucks, promising to pay him back on the following Monday. When Bucks isn’t repaid on the Monday, he leaves several telephone messages on Winger’s answering machine during the rest of the week, complaining that he has not been repaid. The following weekend, Winger appears at Bucks’s front door. He says nothing about the money, but immediately says to Bucks, “I’m afraid that when I took that remote-control model plane I’ve been working on out for a test I lost control and it flew over the fence into your backyard. Could I come through and get it back?” Bucks tells Winger to wait at the front door. He then goes into his backyard and finds the model airplane, only slightly crumpled. He takes the plane and puts it into a storage cabinet on his rear porch. He then returns to the front door. There he tells Winger, “Yep, I’ve found it, and it’s safe and sound. And you can have it back as soon as you pay me that $300 you owe me.” Winger protests that he is currently a little short of funds and that he doesn’t see what one thing has to do with the other, but Bucks is adamant. “You get your toy back,” he tells Winger, “when I get my money.” In taking the position that he does, can Bucks be said to be acting legally (whether or not reasonably or as a neighbor should) because he has an Article 9 security interest in the model plane?

1.3 Sarah is the sole proprietor of a large retail store, Sarah’s Sells-U-Stuff, which offers a wide range of audio, video, and computer equipment, as well as other more mundane household appliances, for sale. Ben comes into Sarah’s store looking to buy a new television, the old one in his apartment just having broken down irreparably. Ben quickly finds just the model he wants, a large flat-screen TV with powerful stereo sound, but is surprised to see how high the price of it is. Sarah assures him that this is actually a very good price, and if he doesn’t have the money on hand to pay for it all at once she is more than willing to sell it to him on credit. Sarah pulls out a form headed “E-Z Pay Monthly Payment Plan Agreement.” She quickly fills in a few blank spaces on the form, giving a description of the particular television as the goods being sold, Ben’s name and address as that of the buyer, and specifying 12 monthly payments that Ben will agree to make to Sarah. The monthly payment amount, Sarah explains to Ben, has been calculated based on the stated cash price of the item and a reasonable rate of interest. The form also states in bold letters that, “The parties hereto agree that title to any merchandise made the subject of this agreement will remain in the Seller until Buyer has made full and final payment of all amounts due hereunder.” Ben signs this agreement, and the next day the new television is delivered to his apartment where he quickly has it set up in his den. Has an Article 9 security interest been created by this transaction? If not, why not? If so, carefully describe who or what is each of the constituent parts of the secured transaction: the obligation, the obligor, the debtor, the secured party, and the collateral.



2.1 The Fresno Furniture Company is in the business of making its own line of furniture that is sold in finer stores throughout the country. The company approaches a major commercial lender and suggests that it put up as collateral for a loan all of the pieces of furniture that are stored in the area of its plant where it keeps finished pieces.

(a) How would the lender have to classify this furniture as potential collateral to deal with this transaction properly?

(b) Suppose that Fresno sells a large selection of its furniture to a wholesale furniture distributor, Westcoast Home Products. What type of potential collateral is this furniture as property of Westcoast?

(c) Westcoast sells a portion of the Fresno Furniture products it has on hand to a retailer, Fred’s Furniture Boutique. How would you now classify this furniture as potential collateral that Fred might subject to a security interest in order to obtain a loan?

(d) Fred sells one of the sofas he has on hand, made by Fresno Furniture, to a customer, one Tanya. Tanya has the sofa delivered to her home where it is placed in her family’s living room. What type of potential collateral is this sofa as owned by Tanya?

(e) What if Tanya, rather than placing the sofa in her living room, were put it in the waiting room of her dental office, which is in a set of rooms attached to her home? Would this change your characterization of the sofa as potential collateral?

2.2 We return now to the manufacturing plant of Fresno Furniture Company. In considering whether or not to offer Fresno a secured loan, and on what terms, how should a potential lender characterize the following property in Fresno’s possession:

(a) the large industrial table saws, lathes, and sanding machines that Fresno uses to make the furniture it sells;

(b) the piles of wood, mounds of stuffing material, and rolls of various fabrics that the company has in its store room, ready to be made into sofas, chairs, etc., as the need arises;

(c) the large quantities of nails, screws, sandpaper, and glue that the company uses in the fabrication of furniture;

(d) the partially completed pieces of furniture in various states of preparation now in the large and bustling workspace in Fresno’s manufacturing facility; and

(e) the completed furniture, carefully wrapped and labeled, in the firm’s end-product storage space?

2.3 Joshua Tillers is a farmer. And on his farm he grows raspberries, bushels and bushels of raspberries. If he were to apply for a secured loan from a local bank, how should the bank’s attorney classify each of the following as potential collateral:

(a) the seed, fertilizer, and pesticides that Tillers has on hand before and during the growing season;

(b) the tractor that Tillers owns and uses on the farm;

(c) the supply of tractor fuel Tillers keeps in a storage tank on the farm;

(d) his raspberries as they are growing in the field; and

(e) the raspberries once harvested?

2.4 Farmer Tillers of the previous example regularly takes a portion of the raspberries he harvests and, rather than selling them to an agricultural distributor, produces homemade preserves himself. The preserves are then put into small jars labeled “Tillers’ Tasty Raspberry Preserves,” each jar with a holiday bow on it. Later in the year, when it is closer to the holiday season, Tillers is easily able to sell crates of these preserves to specialty food shops in the big city or at holiday crafts fairs. How would you classify these crates of preserves as they sit in the corner of his garage during the fall awaiting sale?

2.5 Dumont Cashmore comes into Sarah’s Sells-U-Stuff and asks to be waited on by Sarah personally as he has a big purchase to make. Sarah is more than happy to oblige. With her help Cashmore selects a particular top-of-the-line computer setup. He tells her he wants to purchase a dozen of these machines along with the various add-on components that would be necessary to configure them into a highly reliable network. He also wants the computers to come loaded with a particular spreadsheet program and an accounting program, the names of which he reads off a slip of paper he has pulled from his pocket. On the paper he also has the address to which the purchase is to be delivered, which Sarah recognizes as that of one of the major downtown office buildings. Cashmore then asks if he can buy the entire lot under Sarah’s E-Z Pay Monthly Payment Plan Agreement, under which he will pay the purchase price in monthly installments allowing all that is being purchased to serve as collateral to secure his obligation to her. Again, Sarah is more than happy to accommodate him. Together they fill out the necessary form. At one point the form calls for the customer to specify, by checking the appropriate box, the use to which the purchased merchandise will be put. Cashmore checks the box labeled “Personal or family use,” and not the box labeled “Business or professional use.”

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