Problem.SP vs. buyer

     A.  Colonel Electric, a retired military officer, has decided to own and operate an appliance dealership in California, retailing such "big ticket" items as washers, dryers, stoves, refrigerators, and dishwashers. He soon learns that he must finance his inventory because manufacturers of such items will sell only for cash. He approaches a bank which, convinced of his creditworthiness and his business plan, agrees to "floor plan" his inventory. Pursuant to this floor planning arrangement, bank will periodically advance funds to manufacturers for an inventory of appliances to be shipped to Colonel Electric, and bank will retain a security interest in the inventory to secure repayment by Colonel Electric. In addition, the arrangement calls for Colonel Electric to assign to the bank retail installment contracts signed by customers who purchase appliances from Colonel Electric on credit if the credit has been approved in advance by the bank. Under these retail installment contracts, consumers promise to pay for the appliance(s) purchased over time and grant the seller a security interest in the appliance(s) purchased to secure payment.

     1. How does the bank perfect its security interest in the inventory?   U.C.C. 9-308(a), 9-309, 9-310.

     2. When the inventory is sold to individual consumers, does the bank's existing security interest continue in the collateral sold?  U.C.C. 9-315(a), 9-320(a), (e), 1-201(9). 

     3. If an individual consumer purchases an appliance from Colonel Electric under a retail installment contract that grants a security interest in the appliance to Colonel Electric, what, if anything, may the bank do if the consumer defaults under the retail installment contract after Colonel Electric has assigned the contract to the bank?  U.C.C. 9-607.

     4. Suppose, prior to his or her default, the consumer had sold the appliance at a garage sale? Do the bank's rights against the consumer change? Can the bank find the appliance or the garage sale purchaser? Does the bank have any rights to the appliance? Against the garage sale purchaser?  U.C.C. 9-320(b) addresses these last two questions?  U.C.C. 9-320(b) properly assumes automatic perfection of a purchase money security interest in consumer goods. Is it likely that a secured party like Colonel Electric, which makes many sales on secured credit and probably takes advantage of automatic perfection, will file a financing statement in connection with all of its secured sales such that the priority otherwise given to buyers by U.C.C. 9-320(b) would be denied?  If, for some reason, Colonel Electric does file financing statements in connection with its retail installment sales, is the purchaser at the garage sale likely to tell the seller that he or she will return to buy the refrigerator after checking with the Secretary of State for financing statements? If your answers to the preceding two questions are "no", does U.C.C. 9-320(b)(4) make any sense?  What might make more sense?

     5. Suppose that the consumer referred to in (D), above, couldn't sell the appliance at a garage sale but could and did sell it to a used appliance dealer? Does U.C.C. 9-315(a)(1), 9-320(a), or 9-320(b) protect the used appliance dealer?  Remember to consult U.C.C. 1-201(9).  

     B.  You represent Batmasters & Son, Inc.  Your client is considering the purchase of some bat making equipment from Cooperstown Bat Corporation.   What advice do you have for your client before it consummates a purchase?  U.C.C. 9-315(a), 9-320(a).  Should Batmasters & Son, Inc. feel secure if the bill of sale from Cooperstown Bat Corporation will recite: “Seller warrants that it owns the equipment that is the subject of this bill of sale free and clear of any lien or encumbrance”?

     C.  Aircraft Trading Services (ATS) sold a jet engine to Northeastern Airlines for $400,000, taking $36,000 down and a note, secured by the engine, to be repaid in thirty-six monthly installments of about $10,000 per month.    ATS failed to record its security interest with the Federal Aviation Administration and thus failed to perfect its security interest.  (The federal statutory requirement to record with the Federal Aviation Administration preempts the provisions of Article 9 concerning the method of perfection, but does not otherwise preempt Article 9.  See Commentary.Scope of Article 9).  Thereafter, Northeastern, in violation of the security agreement with ATS, sold the aircraft on which the jet engine had been installed to Braniff Airlines and warranted clean and marketable title to Braniff, something Braniff confirmed by searching the records of the FAA.  Braniff in turn sold the aircraft to an individual named Condron who, prior to purchase, confirmed the absence of any recorded interest with the FAA.  Condron leased the aircraft to United Airlines, with an option to purchase.   Only after the lease transaction was consummated did ATS record its security interest with the FAA.  Although informed of the security interest after entering the lease, United Airlines nonetheless exercised its option to purchase. 

     Northeastern defaulted on its payments to ATS, still owing $140,000, and soon thereafter went into bankruptcy.  ATS seeks recovery from Braniff, Condron, and United Airlines.  Who should prevail?  U.C.C. 9-317(b), 2-403(1).  Do you think that the facts of this problem are farfetched?  They are taken from Aircraft Trading and Services, Inc. v. Braniff, Inc., 819 F.2d 1227 (2d Cir. 1987), part of the holding of which has been changed by language in U.C.C. 9-317(b).    

     D.  All dates specified below are in the same year.

    Carlos Morales, resident of South Lake Tahoe, California, owned a valuable collection of rare books.  He has loaned the books indefinitely to the Rose Garden Public Library ("Library"), located in North Lake Tahoe, Nevada. The Library permits patrons to read the rare book collection on the premises but does not permit patrons to borrow them.

    Carlos approached ABC Finance ("Finance") for a $40,000 loan, to be used in part to help finance his sister's education and in part to retain a lawyer as counsel to a non-profit association Carlos wanted to form to help preserve Lake Tahoe from the adverse consequences of development. Carlos offered the books as collateral. Finance was willing to make the loan, secured by the books (which would remain on loan to the Library).  Assume that a security interest in favor of Finance does not violate the F.T.C. Credit Practices Rule (recall Part B of Problem.FTC Rule).

     On February 15, the following events occurred: Finance advanced Carlos the funds and Carlos signed a note and security agreement in favor of Finance. The security agreement described the collateral as "the following rare books: [stating the title and author of each book]." The Library wrote down for itself and kept in the appropriate file a note that it was holding the rare books on behalf Finance. Finance did not file a financing statement.

    On September 15, the Library temporarily returned the books to Carlos because of remodeling of the Library. On the same day, the Library notified Finance that it had returned the books to Carlos. On September 20, Finance filed a financing statement, containing the information required by U.C.C. 9-502(a), with the office named in Nevada Commercial Code 9-501(a)(2).

    On September 25, Carlos sold 1/2 of the rare books to a bookstore for $5,000. The bookstore is located in California. The bookstore did not know about the security interest when it took delivery of the books.

    On September 30, Finance filed a financing statement, containing the information required by U.C.C. 9-502(a), with the California Secretary of State. The filing office accepted the financing statement for filing even though it failed to contain the debtor's mailing address.

    On November 5, Carlos delivered the remaining rare books to his next door neighbor in settlement of the neighbor's claim that a leak from a broken water line on Carlos' property had damaged the neighbor's property. The neighbor resides in California. The neighbor did not know about the security interest when he took delivery of the books.

    Carlos defaulted on payments to Finance and Finance learned about the delivery of the books to the bookstore and to the neighbor. Finance has written to the bookstore and the neighbor demanding that they surrender the books to Finance. You represent both the bookstore and the neighbor. What will you advise each about the merits of the demand by Finance. In addition to whatever other sections you may deem appropriate, consult U.C.C. 9-520, 9-201(a), 9-315, 9-317, and 9-320.