1

Secured TransactionsAssignment 36

Buyers against Secured Creditors

2

SecuredParty

Seller Debtor

Security Interest

Item BuyerItem

3

SecuredParty

BuyerSeller Debtor ItemItem

Assignment 35 Assignment 36

Security Interest

4

Main Rule:Security Interests Survive

Sale of Collateral

5

§9-201. A security agreement is effective according to its

terms . . . against purchasers of the collateral . . . .

Main Rule:Security Interests Survive

Sale of Collateral

6

§9-201. A security agreement is effective according to its

terms . . . against purchasers of the collateral . . . .

§9-315(a)(1). A security interest . . . continues in collateral notwithstanding sale . . .

Main Rule:Security Interests Survive

Sale of Collateral

7

§9-201. A security agreement is effective according to its

terms . . . against purchasers of the collateral . . . .

§9-315(a)(1). A security interest . . . continues in collateral notwithstanding sale . . . unless the secured party authorizes the disposition free of the security interest . . . .

Exception 1

Main Rule:Security Interests Survive

Sale of Collateral

8

Exception 2: Buyer in Ordinary Course

SecuredParty

BuyerDebtor Collateral

Security Interest

§9-320(a). A buyer in ordinary course of business . . .

9

Exception 2: Buyer in Ordinary Course

SecuredParty

BuyerDebtor Collateral

Security Interest

§9-320(a). A buyer in ordinary course of business . . .

10

Exception 2: Buyer in Ordinary Course

SecuredParty

BuyerDebtor Collateral

Security Interest

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest . . .

11

Exception 2: Buyer in Ordinary Course

SecuredParty

BuyerDebtor Collateral

Security Interest

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller . . .

12

Exception 2: Buyer in Ordinary Course

SecuredParty

BuyerDebtor Collateral

Security Interest

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller . . .

13

Exception 2: Buyer in Ordinary Course

SecuredParty

BuyerDebtor Collateral

Security Interest

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

14

Exception 2: Buyer in Ordinary Course

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

SecuredParty

BuyerDebtor Collateral

Security Interest

But not if the buyer “has knowledge that the sale violates the rights of another person in the goods.” §1-201(b)(9)

15

Exception to 9-320(a) exception: Possession

16

§9-320(e). Subsections (a) and (b) do not affect a security interest in goods in the possession of the secured party under Section 9-313.

Exception to 9-320(a) exception: Possession

17

Exception to 9-320(a) exception: Possession§9-320(e). Subsections (a) and (b) do not affect a security

interest in goods in the possession of the secured party under Section 9-313.

DeeringPossession

Mill Fabrics

Security Interest

Tanbro case, 1976

18

§9-320(e). Subsections (a) and (b) do not affect a security interest in goods in the possession of the secured party under Section 9-313.

DeeringPossession

TanbroBIOCMill Fabrics Sale

Security Interest

Tanbro case, 1976

Exception to 9-320(a) exception: Possession

19

§9-320(e). Subsections (a) and (b) do not affect a security interest in goods in the possession of the secured party under Section 9-313.

DeeringPossession

TanbroBIOCMill Fabrics Sale

Security Interest

Tanbro case, 1976

Exception to 9-320(a) exception: Possession

20

§9-320(e). Subsections (a) and (b) do not affect a security interest in goods in the possession of the secured party under Section 9-313.

DeeringPossession

TanbroBIOCMill Fabrics Sale

Security Interest

Tanbro case, 1976

Revised Article 9, 2001

Exception to 9-320(a) exception: Possession

21

§9-320(e). Subsections (a) and (b) do not affect a security interest in goods in the possession of the secured party under Section 9-313.

DeeringPossession

TanbroBIOCMill Fabrics Sale

Security Interest

Tanbro case, 1976

Revised Article 9, 2001

Would you buy and pay for something that seller doesn’t have in its possession?

Exception to 9-320(a) exception: Possession

22

§9-320(e). Subsections (a) and (b) do not affect a security interest in goods in the possession of the secured party under Section 9-313.

DeeringPossession

TanbroBIOCMill Fabrics Sale

Security Interest

Tanbro case, 1976

Revised Article 9, 2001

Would you buy and pay for something that seller doesn’t have in its possession? Ebay

Exception to 9-320(a) exception: Possession

23

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods

Secured

BuyerDebtor Collateral

Security Interest

24

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods

Secured

BuyerDebtor Collateral

Security Interest

25

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods from a person who used or bought

the goods for use primarily for personal, family, or household purposes . . .

Secured

BuyerDebtor Collateral

Security Interest

26

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods from a person who used or bought

the goods for use primarily for personal, family, or household purposes . . .

Secured

BuyerConsumer Collateral

Security Interest

27

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods from a person who used or bought

the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected,

Secured

BuyerConsumer Collateral

Security Interest

28

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods from a person who used or bought

the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys:

(1) without knowledge of the security interest;

Secured

BuyerConsumer Collateral

Security Interest

29

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods from a person who used or bought

the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys:

(1) without knowledge of the security interest;

(2) for value;

Secured

BuyerConsumer Collateral

Security Interest

30

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods from a person who used or bought

the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys:

(1) without knowledge of the security interest;

(2) for value;

(3) primarily for the buyer’s personal, family, or household purposes

Secured

ConsumerConsumer Collateral

Security Interest

31

Exception 3: Consumer to Consumer§9-320(b). A buyer of goods from a person who used or bought

the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys:

(1) without knowledge of the security interest;

(2) for value;

(3) primarily for the buyer’s personal, family, or household purposes; and

(4) before the filing of a financing statement covering the goods.

Secured

ConsumerConsumer Collateral

Security Interest

33

Exception 4: Unperfected Security Interest§9-317(b). A buyer . . . takes free of a security interest . . . if

the buyer gives value and receives delivery of the collateral without knowledge of the security interest . . . and before it is perfected.

34

Exception 4: Unperfected Security Interest§9-317(b). A buyer . . . takes free of a security interest . . . if

the buyer gives value and receives delivery of the collateral without knowledge of the security interest . . . and before it is perfected.

35SI

Exception 4: Unperfected Security Interest§9-317(b). A buyer . . . takes free of a security interest . . . if

the buyer gives value and receives delivery of the collateral without knowledge of the security interest . . . and before it is perfected.

Notice:

A secured creditor with knowledge has priority over an unperfected secured creditor

Secured

Secured with knowledge

Debtor

Unperfected SI

§9-322(a)

36SI

Exception 4: Unperfected Security Interest§9-317(b). A buyer . . . takes free of a security interest . . . if

the buyer gives value and receives delivery of the collateral without knowledge of the security interest . . . and before it is perfected.

Notice:

A secured creditor with knowledge has priority over an unperfected secured creditor

But a buyer with knowledge doesn’t have priority over an unperfected secured creditor

Secured

Secured with knowledge

Debtor

Unperfected SI

Sale

Secured

Buyer with knowledge

Debtor

Unperfected SI

§9-322(a) §9-317(b)

37

Exception 5: Future Advances§9-323(d). A buyer of goods other than a buyer in the ordinary

course of business . . .

38

Exception 5: Future Advances§9-323(d). A buyer of goods other than a buyer in the ordinary

course of business takes free of a security interest to the extent that it secures [future] advances . . . .

39

Exception 5: Future Advances§9-323(d). A buyer of goods other than a buyer in the ordinary

course of business takes free of a security interest to the extent that it secures [future] advances made after the earlier of

(1) the secured party acquires knowledge of the buyer’s purchase; or

(2) 45 days after the purchase.

40

Exception 5: Future Advances§9-323(d). A buyer of goods other than a buyer in the ordinary

course of business takes free of a security interest to the extent that it secures [future] advances made after the earlier of

(1) the secured party acquires knowledge of the buyer’s purchase; or

(2) 45 days after the purchase.

Sale45 days

Subject to theseadvances

Subject to if S withoutknowledge

41

Exception 5: Future Advances§9-323(d). A buyer of goods other than a buyer in the ordinary

course of business takes free of a security interest to the extent that it secures [future] advances made after the earlier of

(1) the secured party acquires knowledge of the buyer’s purchase; or

(2) 45 days after the purchase.

(e) Subsection (d) does not apply if the advance is made pursuant to a commitment entered into without knowledge of the buyer’s purchase and before the expiration of the 45-day period.

Sale45 days

Subject to theseadvances

Subject to if S withoutknowledge

Subject to if S committed

without knowledge before 46th day

Exception 5: Future Advances§9-323(d). A buyer of goods other than a buyer in the ordinary

course of business takes free of a security interest to the extent that it secures [future] advances made after the earlier of

(1) the secured party acquires knowledge of the buyer’s purchase; or

(2) 45 days after the purchase.

(e) Subsection (d) does not apply if the advance is made pursuant to a commitment entered into without knowledge of the buyer’s purchase and before the expiration of the 45-day period.

Sale45 days

Subject to theseadvances

Subject to if S withoutknowledge

43

Exception 5: Future Advances§9-323(d). A buyer of goods other than a buyer in the ordinary

course of business takes free of a security interest to the extent that it secures [future] advances made after the earlier of

(1) the secured party acquires knowledge of the buyer’s purchase; or

(2) 45 days after the purchase.

(e) Subsection (d) does not apply if the advance is made pursuant to a commitment entered into without knowledge of the buyer’s purchase and before the expiration of the 45-day period.

Sale45 days

Subject to theseadvances

Subject to if S withoutknowledge

Example: Buyer at an execution sale

Subject to if S committed

without knowledge before 46th day

44

SecurityInterest

Problem 36.1.a, page 613

All Sea-sons RV

Eddy

Eddy gives SI to All Seasons, sale prohibited

$17K

45

SecurityInterest

Problem 36.1.a, page 613

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

RV

Lindy

$17K

46

SecurityInterest

Problem 36.1.a, page 613

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

Sunrise sells to Card in ordinary course

Card$23K

Lindy

RV

Lindy

$17K

47

SecurityInterest

Problem 36.1.a, page 613

a. Card sues All Seasons to remove lien. How good is her case? Card loses. In re Sunrise RV, 105 B.R. 587 (1989)

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

Sunrise sells to Card in ordinary course

Card$23K

Lindy

RV

Lindy

$17K

48

SecurityInterest

Problem 36.1.a, page 613

a. Card sues All Seasons to remove lien. How good is her case? Card loses. In re Sunrise RV, 105 B.R. 587 (1989)

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

Sunrise sells to Card in ordinary course

Card$23K

Lindy

RV

Lindy

$17K

49

SecurityInterest

Problem 36.1.a, page 613

a. Card sues All Seasons to remove lien. How good is her case? Card loses. In re Sunrise RV, 105 B.R. 587 (1989)

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

Sunrise sells to Card in ordinary course

Card$23K

Lindy

RV

Lindy

$17K

50

SecurityInterest

Problem 36.1.b, page 613

b. What if Card had demanded certificate of title?

Sunrise has certificate showing Eddy as owner, All Seasons as secured. Back shows signature from Eddy; no place for All Seasons to sign.

Sunrise: “We discharge the lien, you get clear title by mail in two weeks.”

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

Sunrise sells to Card in ordinary course

Card$23K

Lindy

RV

Lindy

$17K

51

SecurityInterest

Problem 36.1.b, page 613

b. What if Card had demanded certificate of title? Who has it?

Sunrise: “We discharge the lien, you get clear title by mail in two weeks.”

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

Sunrise sells to Card in ordinary course

Card$23K

Lindy

RV

Lindy

$17K

52

SecurityInterest

Problem 36.1.b, page 613

b. What if Card had demanded certificate of title? Who has it?

Maybe All Seasons. Maybe Sunrise. Eddy has transferred ownership, but All Seasons has not released lien, page 424.

Sunrise: “We discharge the lien, you get clear title by mail in two weeks.”

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

Sunrise sells to Card in ordinary course

Card$23K

Lindy

RV

Lindy

$17K

53

SecurityInterest

Problem 36.1.b, page 613

b. What if Card had demanded certificate of title? Who has it?

Maybe All Seasons. Maybe Sunrise. Eddy has transferred ownership, but All Seasons has not released lien, page 424.

Sunrise: “We discharge the lien, you get clear title by mail in two weeks.”

All Sea-sons RV

Sunrise RVEddy

Eddy gives SI to All Seasons, sale prohibited

Eddy sells to Sunrise in violation of SA

Sunrise sells to Card in ordinary course

Card$23K

Lindy

RV

Lindy

$17K

54

Problem 36.2.a, page 613

Mall Store

a. Card is buying a reconditioned piano from a store in the Mall. She wants you to represent her at the closing. Is there anything to her fears? Same as with the Lindy.

Card$10K

55

Problem 36.2.a, page 613

Mall Store

a. Card is buying a reconditioned piano from a store in the Mall. She wants you to represent her at the closing. Is there anything to her fears?

Card$10K

56

SecurityInterest

Problem 36.2.a, page 613

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

b. Can we deal with problem by a thorough UCC search?

No. Filing would be against Eddy. §507(a).

All Sea-sons RV

Mall StoreEddy

a. Card is buying a reconditioned piano from a store in the Mall. She wants you to represent her at the closing. Is there anything to her fears? Same as with the Lindy.

Card$10K

57

SecurityInterest

Problem 36.2.a, page 613

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

b. Can we deal with problem by a thorough UCC search?

No. Filing would be against Eddy. §507(a).

All Sea-sons RV

Mall StoreEddy

a. Card is buying a reconditioned piano from a store in the Mall. She wants you to represent her at the closing. Is there anything to her fears? Same as with the Lindy.

Card$10K

58

SecurityInterest

Problem 36.2.b, page 613

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

b. Can we deal with problem by a thorough UCC search?

No. Filing would be against Eddy. §507(a).

All Sea-sons RV

Mall StoreEddy

a. Card is buying a reconditioned piano from a store in the Mall. She wants you to represent her at the closing. Is there anything to her fears? Same as with the Lindy.

Card$10K

59

SecurityInterest

Problem 36.2.b, page 613

§9-320(a). A buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

b. Can we deal with problem by a thorough UCC search?

Difficult. Filing would be against Eddy. §9-507(a). Could be automatic perfection. §9-309(1).

All Sea-sons RV

Mall StoreEddy

a. Card is buying a reconditioned piano from a store in the Mall. She wants you to represent her at the closing. Is there anything to her fears? Same as with the Lindy.

Card$10K

60

SecurityInterest

Problem 36.2.c, page 613

c. What should we do?

Tell her fears are irrational? Like an Airline crash victim.

Send her to a shrink? Take her money, so some investigation. But what if a guardian is appointed?

All Sea-sons RV

Mall StoreEddy

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

61

SecurityInterest

Problem 36.2.c, page 613

c. What should we do?

Tell her fears are irrational? Like an Airline crash victim.

Send her to a shrink? Take her money, so some investigation. But what if a guardian is appointed?

All Sea-sons RV

Mall StoreEddy

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

62

SecurityInterest

Problem 36.2.c, page 613

c. What should we do?

Tell her fears are irrational? Like an Airline crash victim.

Send her to a shrink? Take her money, so some investigation. But what if a guardian is appointed?

All Sea-sons RV

Mall StoreEddy

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

63

SecurityInterest

Problem 36.2.c, page 613

c. What should we do?

Tell her fears are irrational? Like an Airline crash victim.

Send her to a shrink? Take her money, so some investigation. But what if a guardian is appointed?

All Sea-sons RV

Mall StoreEddy

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

64

SecurityInterest

Problem 36.2.c, page 613

c. What should we do?

Tell her fears are irrational? Like an Airline crash victim.

Send her to a shrink? Weyrauch: She won’t go.

Take her money, so some investigation. But what if a guardian is appointed?

All Sea-sons RV

Mall StoreEddy

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

65

SecurityInterest

Problem 36.2.c, page 613

c. What should we do?

Tell her fears are irrational? Like an Airline crash victim.

Send her to a shrink? Weyrauch: She won’t go.

Take her money, do some investigation? But what if a guardian is appointed?

All Sea-sons RV

Mall StoreEddy

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

66

SecurityInterest

Problem 36.2.c, page 613

c. What should we do?

Tell her fears are irrational? Like an Airline crash victim.

Send her to a shrink? Weyrauch: She won’t go.

Take her money, do some investigation? But what if a guardian is appointed?

All Sea-sons RV

Mall StoreEddy

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

67

SecurityInterest

Problem 36.2.d, page 613

d. Could this problem occur with new goods?

Yes. Dealer sells encumbered inventory in bulk.

What is the policy for “created by the buyer’s seller” exception?

Wrongfully sold collateral is like stolen goods. Don’t make a market for it. Void title rule.

Inventorylender

Mall store 2Mall store 1

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

68

SecurityInterest

Problem 36.2.d, page 613

d. Could this problem occur with new goods?

Yes. Dealer sells encumbered inventory in bulk.

What is the policy for “created by the buyer’s seller” exception?

Wrongfully sold collateral is like stolen goods. Don’t make a market for it. Void title rule.

Inventorylender

Mall store 2Mall store 1

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

Bulk sale

69

SecurityInterest

Problem 36.2.d, page 613

d. Could this problem occur with new goods?

Yes. Dealer sells encumbered inventory in bulk.

What is the policy for “created by the buyer’s seller” exception?

Wrongfully sold collateral is like stolen goods. Don’t make a market for it. Void title rule.

Inventorylender

Mall store 2Mall store 1

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

Bulk sale

70

SecurityInterest

Problem 36.2.d, page 613

d. Could this problem occur with new goods?

Yes. Dealer sells encumbered inventory in bulk.

What is the policy for “created by the buyer’s seller” exception?

Wrongfully sold collateral is like stolen goods. Don’t make a market for it. Void title rule. “Secureds need certainty.”

Inventorylender

Mall store 2Mall store 1

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

Bulk sale

71

SecurityInterest

Problem 36.2.d, page 613

d. Could this problem occur with new goods?

Yes. Dealer sells encumbered inventory in bulk.

What is the policy for “created by the buyer’s seller” exception?

Wrongfully sold collateral is like stolen goods. Don’t make a market for it. Void title rule. “Secureds need certainty.”

Truth in Lending Act §170 chargeback is a partial solution.

Inventorylender

Mall store 2Mall store 1

§9-320(a). A buyer in ordinary course of busi-ness . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Card$10K

Bulk sale

72

Truth in Lending Act §170a. Subject to . . . (b), a card issuer [bank] . . . shall be subject

to all claims . . . arising out of any transaction in which the credit card is used as a method of payment . . . if

73

Truth in Lending Act §170a. Subject to . . . (b), a card issuer [bank] . . . shall be subject

to all claims . . . arising out of any transaction in which the credit card is used as a method of payment . . . if

(3) The place where the initial transaction occurred was in the same State as the mailing address previously provided by the cardholder or was within 100 miles from such address . . . .

74

Truth in Lending Act §170a. Subject to . . . (b), a card issuer [bank] . . . shall be subject

to all claims . . . arising out of any transaction in which the credit card is used as a method of payment . . . if

(3) The place where the initial transaction occurred was in the same State as the mailing address previously provided by the cardholder or was within 100 miles from such address . . . .

b. The amount of claims . . . asserted by the cardholder may not exceed the amount of credit outstanding with respect to such transaction at the time the cardholder first notifies the card issuer . . . of such claim.

75

Truth in Lending Act §170a. Subject to . . . (b), a card issuer [bank] . . . shall be subject

to all claims . . . arising out of any transaction in which the credit card is used as a method of payment . . . if

(3) The place where the initial transaction occurred was in the same State as the mailing address previously provided by the cardholder or was within 100 miles from such address . . . .

b. The amount of claims . . . asserted by the cardholder may not exceed the amount of credit outstanding with respect to such transaction at the time the cardholder first notifies the card issuer . . . of such claim.

Scenario: Alecia buys piano. Alecia pays her entire credit card balance. Inventory lender finds Alecia and claims. It is too late for Alecia to claim against the credit card issuer.

76

Problem 36.5, page 614

Davis DeptStore

Beavis

TV

Davis sells TV to Beavis

77

SecurityInterest

Problem 36.5, page 614

Davis DeptStore

Beavis

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement.

78

SecurityInterest

Problem 36.5, page 614

Davis DeptStore

ButtheadBeavisTV, etc.

$960

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement. Beavis sells TV to Butthead, who is a bona fide purchaser for value.

79

SecurityInterest

Problem 36.5, page 614

Can Davis repossess the TV from Butthead?

Davis DeptStore

ButtheadBeavisTV, etc.

$960

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement. Beavis sells TV to Butthead, who is a bona fide purchaser for value.

80

SecurityInterest

Problem 36.5, page 614

Can Davis repossess the TV from Butthead? Yes, §9-201 and §9-315(a)(1).

Davis DeptStore

ButtheadBeavisTV, etc.

$960

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement. Beavis sells TV to Butthead, who is a bona fide purchaser for value.

81

SecurityInterest

Problem 36.5, page 614

Can Davis repossess the TV from Butthead? Yes, §9-201 and §9-315(a)(1).

Does Consumer to Consumer exception save Butthead? §9-320(b).

Davis DeptStore

ButtheadBeavisTV, etc.

$960

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement. Beavis sells TV to Butthead, who is a bona fide purchaser for value.

82

SecurityInterest

Problem 36.5, page 614

Can Davis repossess the TV from Butthead? Yes, §9-201 and §9-315(a)(1).

Does Consumer to Consumer exception save Butthead? §9-320(b). No, because Davis filed a financing statement.

Davis DeptStore

ButtheadBeavisTV, etc.

$960

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement. Beavis sells TV to Butthead, who is a bona fide purchaser for value.

83

SecurityInterest

Problem 36.5, page 614

Can Davis repossess the TV from Butthead? Yes, §9-201 and §9-315(a)(1).

Does Consumer to Consumer exception save Butthead? §9-320(b). No, because Davis filed a financing statement.

Must Davis give Butthead his money back?

Davis DeptStore

ButtheadBeavisTV, etc.

$960

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement. Beavis sells TV to Butthead, who is a bona fide purchaser for value.

84

SecurityInterest

Problem 36.5, page 614

Can Davis repossess the TV from Butthead? Yes, §9-201 and §9-315(a)(1).

Does Consumer to Consumer exception save Butthead? §9-320(b). No, because Davis filed a financing statement.

Must Davis give Butthead his money back? No. Davis didn’t get the money. The money is collateral, §9-315(a)(2).

Davis DeptStore

ButtheadBeavisTV, etc.

$960

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement. Beavis sells TV to Butthead, who is a bona fide purchaser for value.

85

SecurityInterest

Problem 36.5, page 614

Can Davis repossess the TV from Butthead? Yes, §9-201 and §9-315(a)(1).

Does Consumer to Consumer exception save Butthead? §9-320(b). No, because Davis filed a financing statement.

Must Davis give Butthead his money back? No. Davis didn’t get the money. The money is collateral, §9-315(a)(2).

Davis DeptStore

ButtheadBeavisTV, etc.

$960

FSFiled

Davis sells TV to Beavis; takes PMSI and files financing statement. Beavis sells TV to Butthead, who is a bona fide purchaser for value.

Moral: Never give your name at a garage sale

86

Problem 36.8, page 615

FosterMarketing

Mall StoreBIOC

InventoryLender

SecurityInterest

$150K

100%financed

87

SecurityInterest

Problem 36.8, page 615Deutsche

Credit

FosterMarketing

FosterManufacturing

Mall StoreBIOC

InventoryLender

SecurityInterest

$150K

Deal: Foster Marketing takes subject to Deutsche’s SI. §1-302(a).

“Subjectto SI”

100%financed

88

SecurityInterest

Problem 36.8, page 615

§9-320(a). A buyer in ordinary course of business (Mall Store) . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

DeutscheCredit

FosterMarketing

FosterManufacturing

Mall StoreBIOC

InventoryLender

SecurityInterest

$150K

Deal: Foster Marketing takes subject to Deutsche’s SI. §1-302(a).

100%financed

“Subjectto SI”

89

SecurityInterest

Problem 36.8, page 615

§9-320(a). A buyer in ordinary course of business (Mall Store) . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Will this work to defeat the Inventory Lender?

DeutscheCredit

FosterMarketing

FosterManufacturing

Mall StoreBIOC

InventoryLender

SecurityInterest

$150K

Deal: Foster Marketing takes subject to Deutsche’s SI. §1-302(a).

100%financed

“Subjectto SI”

90

SecurityInterest

Problem 36.8, page 615Deutsche

Credit

All QuipRSS, Inc.CasePower

RSS, Inc. and All Quip have identical officers and directors. Case Power was a BFP.

100%financed

Equipment Equipment

“Subjectto SI”

91

SecurityInterest

Problem 36.8, page 615

§9-320(a). A buyer in ordinary course of business [Case Power] . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

DeutscheCredit

All QuipRSS, Inc.CasePower

RSS, Inc. and All Quip have identical officers and directors. Case Power was a BFP.

100%financed

Equipment Equipment

“Subjectto SI”

92

SecurityInterest

Problem 36.8, page 615

§9-320(a). A buyer in ordinary course of business [Case Power] . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Will this work to defeat the Inventory Lender?

DeutscheCredit

All QuipRSS, Inc.CasePower

RSS, Inc. and All Quip have identical officers and directors. Case Power was a BFP.

100%financed

Equipment Equipment

“Subjectto SI”

93

SecurityInterest

Problem 36.8, page 615

§9-320(a). A buyer in ordinary course of business [Case Power] . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Will this work to defeat the Inventory Lender? Deutsche Credit v. Case Power & Equipment, 876 P.2d 1190 (Ariz. App. 1994).

DeutscheCredit

All QuipRSS, Inc.CasePower

RSS, Inc. and All Quip have identical officers and directors. Case Power was a BFP. Court held for Deutsche.

100%financed

Equipment Equipment

“Subjectto SI”

94

SecurityInterest

Problem 36.8, page 615Deutsche

Credit

All QuipRSS, Inc.CasePower

RSS, Inc. and All Quip have identical officers and directors. Case Power was a BFP. Court held for Deutsche.

100%financed

Court: “We do not wish our holding here to be read as giving parties a license to engage in practices similar to those employed by RSS and All Quip. In our opinion, such title transfers between closely held corporations with common ownership will, upon scrutiny, often reveal a pattern of abuse of the corporate form sufficient to justify piercing the corporate veil.”

Equipment Equipment

“Subjectto SI”

95

SecurityInterest

Problem 36.8, page 615

§9-320(a). A buyer in ordinary course of business (Mall Store) . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Ethical problem here? Paolella, 587. “Unless the creditor has become the alter ego of the debtor, he will not be held to an ethical duty in excess of the morals of the marketplace.”

DeutscheCredit

FosterMarketing

FosterManufacturing

Mall StoreBIOC

InventoryLender

SecurityInterest

$150K

Deal: Foster Marketing takes subject to Deutsche’s SI

100%financed

“Subjectto SI”

96

SecurityInterest

Problem 36.8, page 615

§9-320(a). A buyer in ordinary course of business (Mall Store) . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Ethical problem here? Paolella, 587. “Unless the creditor has become the alter ego of the debtor, he will not be held to an ethical duty in excess of the morals of the marketplace.”

DeutscheCredit

FosterMarketing

FosterManufacturing

Mall StoreBIOC

InventoryLender

SecurityInterest

$150K

Deal: Foster Marketing takes subject to Deutsche’s SI

100%financed

“Subjectto SI”

97

SecurityInterest

Problem 36.8, page 615

§9-320(a). A buyer in ordinary course of business (Mall Store) . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Ethical problem here? Paolella, 580. “Unless the creditor has become the alter ego of the debtor, he will not be held to an ethical duty in excess of the morals of the marketplace.”

DeutscheCredit

FosterMarketing

FosterManufacturing

Mall StoreBIOC

InventoryLender

SecurityInterest

$150K

Deal: Foster Marketing takes subject to Deutsche’s SI

100%financed

“Subjectto SI”