EXAM TICKET NO. _________________
Commercial Transactions
Georgetown University Law Center
Prof. Avery Katz
Quiz #1
February 10, 1995
Answers
Questions 1-8 are based on the following facts.
Farmer Fred sold cattle to Pennypacker. Their oral contract anticipated immediate payment, but Pennypacker knowingly paid Fred for cattle using bad checks that were later dishonored. Pennypacker had given a security interest in its inventory, including any after-acquired inventory, to Banker. Pennypacker sold some of the slaughtered carcasses to Swift, a regular customer, for cash, which it used to buy more cattle from Nabors. Fred and Banker are disputing the priority in the carcasses on Pennypacker's premises.
1. Fred has a security interest in the remaining carcasses on Pennypacker's premises.
F: Pennypacker never agreed to give Fred a SI; in any event there was no writing.
2. Banker has a security interest in the carcasses on Pennypacker's premises, including the ones purchased from Nabors.
T: 9-204 authorizes the parties to create a SI in after-acquired property, and the carcasses are inventory.
3. Pennypacker had voidable title to the cattle it bought from Fred
T: It bought in a transaction of purchase; covered by 2-403(1)(b).
4. Banker is a good faith purchaser of the cattle.
T: There is nothing to indicate bad faith, and a security interest is included as a purchase transaction under 1-201.
5. Banker would have priority in the carcasses over Fred under either 2-403(1) or 2-403(2).
F: Banker would not have priority under 2-403(2) because it cannot qualify as a BIOC.
6. Swift would have priority over Fred under either 2-403(1) or 2-403(2).
T: Swift is a good faith purchaser for value and also a BIOC.
7. Pennypacker is a buyer in ordinary course with respect to the cattle it bought from Fred.
F: BIOC's must be in good faith, which requires honesty in fact. Packer knowingly paid with bad checks.
8. Suppose that the cattle sold by Fred included some from Nabors' herd, who had without Nabors' knowledge wandered over onto Fred's property. Nabors will nonetheless lose priority in the cattle under 2-403.
F:
Fred didn't have voidable
title in Nabors' cattle (no transaction of purchase), and Nabors never
entrusted the cattle to Fred. Conceivably
Nabors could still lose under an estoppel theory under 1-103.
Questions 9-16 are based on the following fact pattern.
Lane Lumber, Inc., an close corporation owned entirely by Lori Lane and doing business in Baltimore, was indebted to Bank on a promissory note in the amount of $120,000, payable on demand. Bank became worried about its loan and threatened to call the note unless it got a security interest in Lane Lumber's inventory and equipment; Lane agreed to this. Bank prepared a new contract to this effect, mistakenly listing the debtor as "Lori Lane." Lane, who had never agreed to assume personal responsibility on the contract, signed it as "Lane Lumber, Inc., by Lori Lane, President." Bank filed the contract in the Baltimore county record office under the name of Lori Lane. It never filed under the name of Lane Lumber, Inc. Okun, another creditor of Lane's, was later unable to find a copy of the financing statement in the records, even though he knew about the contract at the time it was arranged.
9. Bank never gave new value, and so failed to comply with 9-203.
F: New value is not required to be given, only value. Pre-existing debts count as value under 1-201.
10. Apart from any issue of value, Bank's security interest attached as soon as Lori Lane signed the contract.
T: Value was given, Lane Lumber had rights in the collateral, and there is a signed writing evidencing the agreement.
11. Bank's filing under the name of Lori Lane complied with the requirements of 9-402(1) [R 9-502(a)].
F: 9-402 [R 9-502(a)] requires a financing statement to show the name of the debtor itself [and R 9-503 makes clear that for a registered organization this requires the legal name.]
12. Bank did not file its financing statement in the right place or places.
T: Under 9-401, a financing statement must be filed in the office of the Secretary of State. [The same is true under R 9-501. Note that under the old Article 9, there was greater scope for local filing in the county office.]
13. If Lane Lumber goes bankrupt, Bank will lose the protection of its security interest and will have to share pro rata as an unsecured creditor.
T: As an unperfected secured creditor, bank will lose to the bankruptcy trustee under 9-301 [R 9-317].
14. If Bank refiles under the name of Lane Lumber, Inc., this filing will be effective against Okun.
T: This corrects any mistake in name; under 9-401(2) the mistake in place does not apply to those with knowledge of the contents of the financing statement [note, the rule of 9-401(2) was not continued in R 9-501].
15. So long as Lane stays out of bankruptcy, Bank will have priority over any unsecured creditors.
T: Under 9-201.
16. If Bank refiles under the name of Lane Lumber, Inc, Bank will have priority over anyone who buys lumber from Lane.
F: Under 9-307
[R 9-320] buyers in the
ordinary course defeat even a perfected secured creditor.
Questions 17-24 are based on the following fact pattern.
Bunsen Marine Sales sold a new sailboat to Conrad, a professional fisherman, on Monday, September 1 and took back a security interest and promissory note. Because of a clerical error, Bunsen did not immediately file, as was its ordinary practice. After a weekend on the bay, Conrad decided he did not like the feel of the boat and sold the sailboat to Mathilde, a sports enthusiast, who found no recorded interest when she searched the records at the Secretary of State's. This took place on Monday, September 8. The next day, Bunsen discovered its clerical error and filed. Still later, Mathilde discovered hang-gliding and sold the sailboat to Carbuncle, a used boat dealer.
17. Bunsen was unperfected when Conrad sold the boat to Mathilde.
T: There had been no filing. (The assumption here was that because Conrad is a professional fisherman, the sailboat is not consumer goods and so filing is required; I have since been told by students who know more than I do about the fishing industry that no professional would use a sailboat for business purposes.)
18. Mathilde will have priority in the boat over Bunsen.
T: She's a buyer out of the ordinary
course, but Bunsen was unperfected when she gave value.
9-301(1)(c) [The outcome might be different under Revised
9-317, depending on how we classify Conrad's status.
Specifically, R 9-317(b) defers to 9-317(e); this latter
subsection gives a purchase-money secured credit a 20-day grace period
to file and still take priority over an intervening buyer out of the
ordinary course. Comment 8 to 9-317 explains this change in the
law. But, 9-317(e)
begins with the clause, "Except as otherwise provided in Sections 9-320
and 9-321..." And 9-320(b)(4) takes away this 20-day grace
period in the case of consumer-to-consumer buyers.]
19. A lien creditor who levied on the boat on September 5
would have had priority in the boat over Bunsen.
F: As a purchase money creditor, Bunsen had a ten day grace period to file and gain priority over a lien creditor under 9-301(2). [R 9-317(e) extends this grace period to twenty days.]
20. Bunsen will have priority in the boat over Carbuncle, since it bought after Bunsen filed.
F: Carbuncle gets Mathilde's rights under the shelter principle of 2-403(1).
21. Had Mathilde been a professional fisherman, as opposed to a sports enthusiast, Bunsen would have priority in the boat over Mathilde.
F: She'd still be a buyer out of the ordinary course, and would still beat an unperfected security interest.
22. Had Conrad been a sports enthusiast, as opposed to a professional fisherman, Bunsen would have been perfected all along.
T: A purchase money interest in consumer goods is automatically perfected under 9-302(d) [R 9-309(1)].
23. Had Conrad been a sports enthusiast, as opposed to a professional fisherman, Bunsen would have priority in the boat over Mathilde.
F: She would have priority under 9-307(2) [R 9-320(b)], as a consumer buying from a consumer.
24. Had Bunsen simply retained title to the sailboat pending full payment, instead of taking a security interest, it would not have had to worry about filing its interest.
F: A conditional sale is treated
as a security interest under 9-102 [R 9-109, see also 1-201(37)].
Questions 25-32 are based on the following fact pattern.
Ajax Credit Association lent $30,000 against two tractors in the possession of King Construction, and filed a financing statement on February 1. The tractors had been purchased last year from John Deere Co. for 50% cash and the other 50% on a purchase money security interest. John Deere, however, filed its financing statement in the wrong place. On March 1, the tractors were seized by Gravel, one of King's many unpaid subcontractors, under a valid judgment lien. On April 1, Ajax lent King an additional $25,000 pursuant to a future advance clause in their original contract. On May 1, Gravel held a sheriff's sale and sold the tractors to King's main competitor, Queen Construction.
25. Ajax will have priority in the tractors over Gravel at least with respect to its original $30,000 loan.
T: Ajax was perfected when Gravel became a lien creditor.
26. Ajax will have priority in the tractors over Queen at least with respect to its original $30,000 loan.
T: Queen was not a buyer in ordinary course, and can have no better rights than Gravel.
27. King will have priority in the tractors over Queen.
F: If the lien is valid, Gravel's rights to the tractors are superior to King's, and therefore so are Queen's.
28. Deere did not need to file to be perfected.
F: Filing is ordinarily required under 9-302 [R 9-310]. No exception is relevant here.
29. Deere will have priority in the tractors over Gravel.
F: A lien creditor has priority over an unperfected security interest.
30. Ajax will have priority in the tractors over Gravel to the extent of the entire $55,000 it lent.
T: It has 45 days under 9-301(4) [R 9-323(b)] for its future advances to get priority.
31. Suppose that Ajax knew that Gravel had seized the tractors when it lent on April 1. In this case, Ajax will not have priority in the tractors over Gravel and Queen to the extent of the entire $55,000 it lent.
F: The 45-day grace period under 9-301(4) [R 9-323(b)] does not depend on knowledge. Without knowledge of the lien, Ajax would have even more than 45 days.
32. Suppose that Ajax lent King the $25,000 on April 1 as part of a scheme to pay off Deere, and that Ajax subsequently received a $5000 kickback from Deere as part of the transaction. In this case, Ajax will not have priority in the tractors over Gravel and Queen to the extent of the entire $55,000 it lent.
T: This would probably not be
considered a future advance, and in any event it sounds like a
fraudulent conveyance designed to deprive Gravel
of its priority position over Deere.
Questions 33-36 are based on the following fact pattern.
Cooke, a wine fancier, borrowed $10,000 from Haddon, another wine fancier, and for collateral turned over possession of ten cases of burgundy wine worth $20,000 that would not fully mature for two years. Eventually Cooke's other creditors caught up to him, and Cooke agreed to relinquish all his rights to the burgundy to one of them, named Staff. When Staff called on Haddon at his cellar with $10,000 in hand, however, he discovered that three-quarters of the bottles of burgundy had been consumed.
33. Haddon had a security interest in the burgundy
T: The possession sufficed to evidence the security agreement under 9-203.
34. If Haddon ever had a security interest in the burgundy, it was never perfected.
F: It was perfected by possession.
35. Staff was entitled to reclaim the burgundy from Haddon at the price of $10,000, plus any accrued interest.
T: Under the shelter principle of 2-403 (and the common law), Staff has the same rights as his transferor Cooke, including the right to repay the loan and redeem the collateral.
36. Now that the burgundy has been drunk, Staff is entitled to recover its value from Haddon, less $10,000 and any accrued interest.
T: Under 9-207.
END OF QUIZ