This is a three-hour examination. It consists of two questions. When calculating the grade for the secured transactions segment of the course, I will weight the first question forty percent (40%) and the second question sixty percent (60%).
This is an open book examination. During the examination you may consult any written materials except materials checked out of the law library.
Assume that the 1994 official text of the Uniform Commercial Code is in force in all relevant jurisdictions unless you are otherwise expressly directed. Where the text sets out alternate provisions (e.g., 9-401(1)), assume that the second alternative is in force.
Read each question carefully. Organize your answer before you begin to write and emphasize those points you think are most significant. If you find an ambiguity or if you need more facts, make reasonable assumptions and state these clearly in your answer. Be concise. Be clear. Good luck!
Florida Consumer Computers Corp. (FCC) is a Florida corporation specializing in the retail distribution of personal computers to consumers. Established in 1990, FCC initially opened outlets only in Florida.
Computer Systems Inc. (CSI) is a wholesale distributor of personal computers to customers in all parts of the United States. Until 1993 CSI also distributed computers through its own retail outlets in Alabama, Florida, and Georgia.
On March 2, 1993, CSI entered into a contract with FCC for the sale by CSI to FCC of CSI's retail outlets. The purchase price for the outlets, including all the inventory at each outlet, was $3.2 million payable over five years. FCC signed an installment note in this amount. To secure its obligation on the note FCC signed a security agreement granting CSI a security interest in, inter alia, all of FCC's "present and future computer inventory and accounts arising from the sale thereof." FCC also signed a financing statement setting out the names and addresses of the parties and describing the collateral as "computer inventory and accounts receivable." CSI promptly filed the financing statement in the Secretary of State's office in Florida.
The March 2, 1993 contract also committed FCC to purchase from CSI a percentage of its future inventory of personal computers as calculated according to a carefully drafted formula. It was agreed that CSI would send these computers to a warehouse owned by an independent warehouse company in Tallahassee, Florida. FCC would then direct the warehouse operator to forward the computers to the relevant outlets in Florida, Alabama, or Georgia.
On June 30, 1995, FCC defaulted on its payments to CSI. After negotiations with CSI, FCC voluntarily turned over to CSI all its assets, including the inventory in all of the retail outlets, on July 14. CSI immediately notified all of FCC's account debtors to make future payments to CSI. One week later FCC filed a voluntary bankruptcy petition to initiate a Chapter 7 proceeding.
You have been hired by the bankruptcy trustee to evaluate whether the trustee may avoid any security interest that CSI might have. Advise the trustee.
[The facts of this examination question are drawn from
The question asks whether FCC's trustee in bankruptcy may avoid some or all of CSI's security interest in FCC's inventory and accounts receivable.
1. As for the inventory in the Florida outlet (both whatever original inventory items that remain from the March 1993 sale all subsequent inventory items FCC acquired from CSI after that date), CSI has a perfected security. The security interest attached to these inventory items: the signed security agreement adequately described the collateral, including after-acquired inventory and accounts; CSI gave value when it sold the outlets on credit; FCC received rights in inventory items when they were identified. U.C.C. 9-203(1), 9-204(1). Filing a properly-completed financing statement with the Florida Secretary of State effectively perfected the security interest. U.C.C. 9-303(1), 9-302(1), 9-401, 9-402. Because CSI's interest is perfected, the trustee in bankruptcy cannot use the strong-arm clause to avoid CSI's interest. Bankruptcy Code 544(a); U.C.C. 9-201, 9-301(1)(b).
When concluding that the security interest is perfected, the principal possible issue is whether the description in the security agreement and financing statement is adequate within the meaning of section 9-110. -- The description of the after-acquired inventory and accounts allow a third party to identify the future property with sufficient certainty. -- The description in the financing statement also gave effective notice to third parties. The description satisfied the requirement that it refer at least to the "type" of collateral. Authorization to state the "type" of collateral also excuses the need to refer explicitly to after-acquired inventory. In any event, one could argue that the very words "inventory" and "accounts receivable" when used without qualification refer to both present and future property.
2. As for inventory items in the Florida warehouse, CSI probably has a perfected security interest in them. In addition to the above analysis, we would have to determine whether the warehouseman had issued a negotiable warehouse receipt. Given that the warehouse arrangement was for temporary storage before delivery to FCC outlets rather than to customers, it would be unusual for the warehouseman to issue negotiable documents of title. If there were no negotiable documents, CSI would have a perfected security interest by virtue of its filed financing statement. U.C.C. 9-304(3). If there were negotiable documents outstanding, then CSI would only have an unperfected security interest unless it took possession of the documents -- a fact that is not resolved by the statement of facts. U.C.C. 9-304(2). (Although one can perfect a security interest in a negotiable document by filing, the filing must be with respect to the document rather than the goods represented by the document. Here the filed financing statement refers only to the goods rather than to negotiable documents. U.C.C. 9-304(1).)
3. As for the inventory in the Alabama and Georgia outlets, CSI has a perfected security interest but except for inventory items sent from Florida within the four months before FCC filed the chapter 7 petition the trustee in bankruptcy may avoid the security interest as a preference. CSI failed to file a financing statement in Alabama and Georgia as required by the laws of those states (i.e., U.C.C. Art. 9 as adopted in those states) but CSI did take possession of the inventory when it took over all the FCC assets on July 14, 1995. The secured party's possession perfects the interest. U.C.C. 9-305. However, the transformation of the interest from an unperfected to a perfected one is a preferential transfer within 90 days of the bankruptcy petition and therefore the trustee in bankruptcy may avoid it. Bankruptcy Code 547(b).
CSI's perfected security interest in inventory items received from the Florida warehouse during the four months before FCC filed the bankruptcy petition depends on a distinct analysis. CSI had a perfected security interest in the goods stored in the independent warehouse in Florida; the goods delivered from the warehouse thus came into Alabama and Georgia subject to a perfected security interest and under section 9-103(1)(d) (as enacted in Alabama and Georgia) CSI had four months of automatic perfection. Consequently, at the time that FCC filed its chapter 7 petition CSI had a continuously perfected security interest that does not depend on CSI taking over possession of the FCC assets. The trustee may not use his or her strong-arm power. Moreover, because the security interests were continuously perfected there was no transfer of an interest during the 90 day period before the bankruptcy petition was filed and thus no preferential transfer.
4. As for the accounts arising from sales by all outlets, CSI has a perfected security interest if we assume that FCC had its chief executive office in Florida. Section 9-103(3)(b) as adopted by all relevant jurisdictions directs CSI to file in the state where FCC is located. FCC is located where its chief executive office is located. U.C.C. 9-103(3)(d). The trustee in bankruptcy may not avoid CSI's perfected security interest pursuant to the strong-arm power. The trustee may be able to avoid some of CSI's claim as preferential if he or she can show that the accounts had been manipulated in CSI's favor during the 90 days before FCC filed the chapter 7 petition. Bankruptcy Code 547(c)(5). There are insufficient facts to suggest whether this is a possibility in this case.
There is an issue about the scope of the "accounts" that CSI may claim. The security agreement refers to "accounts" while the financing statement refers to "accounts receivable." The former word is limited to intangibles by Article 9's definition ( 9-106(1)), while the latter phrase usually refers to both tangible and intangible receivables. If CSI's interest is limited to the former technical definition, then CSI must turn over all checks and other tangible accounts receivable because they would not be subject to the security interest. CSI will argue that the security agreement is ambiguous and that it should be read together with the contemporaneous financing statement. The trustee should attack this argument. The required description in a financing statement is permitted to be broader (description by type) than the description in a security agreement. The financing statement, therefore, is not good evidence of the parties' intent on the scope of the security interest.
Copper Printing Company, Inc. (Copper) is a Texas corporation engaged in the business of printing magazines. For the last decade Texas Commerce Bank (TCB) has financed Copper's operations by periodic loans. Every two or three years these loans are consolidated and renewed, most recently on July 1, 1995. To secure repayment of these loans, Copper signed a security agreement granting TCB a security interest in all its "equipment, inventory, accounts, chattel paper, and general intangibles used in or created by [Copper's] printing business." Copper also signed a financing statement setting out the names and address of the two parties and describing the collateral in exactly the same language as the security agreement. TCB filed the financing statement with the Texas Secretary of State's office on January 2, 1992.
In the summer of 1994 Copper decided that it would replace one of its printing presses with a new one. On August 31, 1994, Copper sold its used printing press to Beermeister Lithography (Beermeister), another Texas corporation, for $835,000. The purchase price was payable with $250,000 as a cash down payment and $585,000 in the form of a installment promissory note payable to the order of Copper [the Beermeister note]. Beermeister secured the note by granting to Copper a security interest in the press. Beermeister signed and delivered to Copper a security agreement describing the equipment in detail.
TCB agreed to the sale of the press, which was covered by TCB's security interest. On August 30, 1994, TCB signed a release of its security interest in the press and Copper filed the release with the Texas Secretary of State's office pursuant to U.C.C. 9-406 on September 10, 1994. The release stated that "TCB releases its security interest in the following collateral: [detailed description of the printing press]." In return for the release of the security interest, Copper assigned the Beermeister note and security agreement to TCB and delivered physical possession of the documents to TCB. The assignment was set out in a separate document; Copper did not indorse the note over to TCB.
Opic Finance Company (Opic) financed Beermeister's cash down payment and Beermeister granted Opic a security interest in the purchased printing press to secure its promise to repay the Opic loan. On August 31, 1994, Beermeister signed an installment note payable to the order of Opic [the Opic note], a security agreement, and a financing statement; the last two documents describe the equipment in full and accurate detail. Opic promptly filed the financing statement with the Texas Secretary of State.
Beermeister defaulted on the Beermeister note by failing to pay an installment due on February 1, 1996. One week later Beermeister also defaulted on the Opic note. On February 22, 1996, Beermeister voluntarily surrendered possession of the printing press to Copper. Opic knew about Beermeister's surrender of the printing press but said nothing.
After giving notice on March 21, 1996, to both TCB and Opic that it would proceed with a private sale, Copper arranged to sell the press to Tech-Press, another Texas corporation, for $485,000 on April 1, 1996. Tech-Press paid for the press with a cashier's check payable to Copper which, as agreed, it delivered to Copper on April 11, 1996. Copper promptly opened a deposit account at First National Bank of Dallas and deposited the check. There have been no withdrawals from this deposit account.
On May 2, 1996--and by complete coincidence--both Copper and Beermeister filed voluntary chapter 11 bankruptcy petitions.
You are an attorney for TCB. The bank asks you to report on the status of its claim to the Tech-Press payment. Advise TCB.
[The facts of this examination question are drawn from
TCB had a perfected security interest in the press prior to its sale to Beermeister. The interest had attached ( 9-203(1)); TCB filed a properly-completed financing statement in the proper office ( 9-302(1), 9-401, 9-402); the interest was therefore perfected ( 9-303).
After the sale to Beermeister, TCB had a security interest in the press notwithstanding the release because Copper assigned to TCB an interest in the Beermeister note and security agreement granting a security interest in the press to secure the note. The note and security agreement constituted chattel paper. The secured obligation represented by the chattel paper was not as valuable as it could have been because Copper failed to file a financing statement with respect to the press and thus the security interest in the press was unperfected. Although TCB had a perfected security interest in the chattel paper that perfection does not perfect the security interest in the press.
(The failure to indorse the note is not relevant because it is not necessary to do so in order to assign an interest in the note or the chattel paper. Indorsement would be relevant if TCB sought to enforce the note as a "holder." Here, however, TCB merely wants to show that it had an interest as an assignee.)
When the press was surrendered to Copper, it could be argued that Copper acted as an agent for TCB (whether or not Copper also acted as agent for Opic) and that Copper's possession of the press perfects the security interest. U.C.C. 9-305. (Section 9-306(5)(a) would not be relevant because the press was no longer collateral at the time of Copper's sale to Beermeister.) TCB's security interest would become perfected on February 22, 1996.
The sale to Tech-Press cuts off TCB's security interest (whether or not the security interest is perfected) but that security interest would attach to the proceeds, first an account (i.e., Tech-Press' promise to pay the purchase price), then the certified check, and finally the deposit account. The interest in the proceeds was automatically perfected for ten days. U.C.C. 9-306(3). To be continuously perfected after that date, however, TCB must satisfy one of the four paragraphs in section 9-306(3). Whether TCB has done so depends on whether the "original collateral" was the chattel paper or the press.
-- If the original collateral was the chattel paper, TCB would have a filed financing statement covering the original collateral. A security interest in the initial proceeds -- the account -- would be perfected by filing in the Secretary of State's office and TCB would satisfy section 9-306(3)(a). As for the check and deposit accounts, these proceeds are identifiable "cash proceeds" ( 9-306(1)) and therefore TCB would satisfy section 9-306(3)(b).
-- If the original collateral was the press, TCB would not have satisfied subsections 9-306(3)(a) or (b) because the filed financing statement does not cover the press after the release of TCB's interest in the press was filed.
Because TCB released its security interest in the press before the sale to Beermeister, the original collateral (i.e., the collateral from which TCB traces its interest) is probably the chattel paper. Consequently, TCB's security interest should be perfected.
Because TCB's security interest in the deposit account is perfected at the commencement of the chapter 11 proceedings, the relevant debtor-in-possession, Beermeister, may not avoid TCB's interest in the deposit account. Bankruptcy Code 544(a)(1); U.C.C. 9-201, 9-301(1)(b).
The debtor-in-possession may, however, avoid TCB's security interest as a preferential transfer. Bankruptcy Code 547(b). There was a transfer of an interest by Beermeister to TCB when its unperfected security interest in the printing press became perfected on February 22. That transfer satisfies section 547(b):
-- the transfer was for the benefit of TCB, a creditor ( 547(b)(1));
-- the transfer was on account of an antecedent debt which appears to be no later than July 1, 1995 ( 547(b));
-- the transfer was made while the debtor was presumed to be insolvent ( 547(b)(3), (f));
-- the transfer (February 22) was made within 90 days before the date of filing of the petition (May 2) ( 547(b)(4)); and
-- the transfer enabled TCB to receive more than it would have received as an unsecured creditor in a chapter 7 liquidation.
[The question asks only about the status of TCB's security interest in the deposit account. Only if TCB's interest survived attack by the debtor in possession would the analysis have to go on to analyze the relative priority of TCB's interest. For students who took the trouble to analyze these other interests, the following analysis is offered.]
1. Opic's interest in the deposit account. Opic had a perfected security interest in the press. Following Beermeister's default, Opic knew that Beermeister had surrendered the press to Copper and it said nothing. Opic's silence may be interpreted in several different ways: a release of Opic's security interest in the press and in any proceeds of the disposition of the press; a willingness to allow Copper (who, after all, knew about printing presses) to dispose of the press on the assumption that Opic had an interest in the proceeds of the sale. The former interpretation is not only unlikely but also unenforceable because there is no consideration making this implicit promise enforceable. The latter interpretation is therefore more likely. When disposing of the press Copper would therefore be acting not only for itself and TCB but also for Opic. Opic's security interest in the proceeds, however, is continuously perfected because Opic satisfied section 9-306(3)(a) (with respect to the initial account) and section 9-306(3)(b) (with respect to the certified check and the deposit account). This security interest is not limited by section 9-306(4): the deposit account contains only identifiable proceeds. U.C.C. 9-306(4)(a). Beermeister, as debtor-in-possession, may not avoid the security interest by using the strong-arm clause. Because Opic's security interest is continuously perfected, there was no transfer of an interest during the 90 days before Beermeister filed its chapter 11 petition and therefore no preferential transfer under BC 547(b).
2. Copper's interest in the deposit account. Copper had an unperfected security interest in the press following the sale to Beermeister. Copper assigned its security interest when it assigned the chattel paper to TCB. If this assignment was for security, Copper retained ownership of Beermeister's secured promise and would perfect the security interest in the press by taking possession of the press. The sale to Tech-Press cuts off this security interest but would attach to the proceeds. The interest in the proceeds was automatically perfected for ten days but perfection lapsed at the end of this period because TCB does not satisfy any of the subsections of section 9-306(3). Because this security interest in the deposit account is unperfected at the commencement of the chapter 11 proceedings, TCB's interest in the deposit account may by avoided by the debtor in possession, Beermeister. Bankruptcy Code 544(a)(1).
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