Octopus National Bank (ONB) has employed you as its Senior Article 9 Consultant. The CEO of ONB tells you that Massive Dynamics, a corporation with its chief executive office in Texas and incorporated under the laws of Delaware, wants to borrow USD $1,000,000 to finance the development of one of its new products. Massive Dynamics has offered the following items as collateral for this loan. For each item, advise the CEO whether (1) Article 9 applies, and, if Article 9 applies, (2) the classification of the collateral, and (3) how ONB should perfect a security interest in the collateral.
The Octopus National Bank (ONB) is in communication with Massive Dynamics to provide a loan of $ 1,000,000. The loan needs a collateral security which Massive Dynamics is ready to provide. The company has provided a list of 6 items to be collateral security. The job is to examine the security under Article 9.
The Ucc (Uniform Commercial Code) states various sections on the possession of the goods that are to be offered for collateral security. The 9-203 section states that the goods that are to be offered for the collateral security should have the following features:
· The security must be in the possession of the debtor. In other cases the debtor should be bound by a contract or security agreement depiction the description of the goods. The goods here may include lands and crops.
· The value of the security must be given.
· The debtor should have rights in the collateral.
· In the case of dispute, the security agreement will have the last say and will offer protection to the benefited of the security contract.
The company has provided a list of various collateral securities which are to be discussed one by one:
10 acres of land in Arizona which Massive Dynamics owns and uses to conduct product safety tests. In this case the company fulfills all the criteria depicted above. The secured party is the company and this is safe collateral. ONB should take the collateral security that would help it to secure the loan to a great extent.
The crops growing on 100 acres of land in Kansas which Massive Dynamics actively farms to provide organic food for its employees. The land is farmed by the company whereas the ownership of the land has not been mentioned clearly. It may happen that the company may work under the ownership of another company. In this case the security interest lies with the actual owner and the bank will not be doing well in taking this as a collateral.
A certificate for 20,000 shares of Massive Dynamics stock. In this case the ownership is clear but the value of the shares is determined by the market value and the bank may suffer if the market crashes. Therefore, the bank should not accept the collateral.
A Megalon Model NCC-1701 computer which Massive Dynamics uses to manage its accounts receivable and payroll. The computer is on casters and is thus very easy to move. The ownership lies with the company and the security interest is also lying with the company. When the computer is passed it becomes the possession of the bank. The bank may accept the collateral and it is a good option.
A SuperCool Model Mark VI central air conditioning unit that is installed in Massive Dynamics’ manufacturing facility located in Grand Haven, Michigan. In this case also, the ownership and the security lie with the company. Therefore, when this is passed to the bank then it becomes a good collateral.
A limousine which the President of Massive Dynamics uses to escort potential clients around its facilities. The car may be the personal property of the President. If this is a personal property, it cannot be collateral for the loan. If the car is the property of the company, it can be termed as collateral. In the case of the personal property, the security lies with the President. The loan is taken in the name of the company and therefore, the bank can never claim the collateral. (Nowka, 2009)
Gloria owned and operated a new and used office furniture business in New York called Gloria’s Depot. She bought her new inventory from manufacturers and her used inventory from the general public. On January 2, 2010 Gloria borrowed USD $25,000 for working capital from Octopus National Bank (ONB) and signed a security agreement giving ONB a security interest in all of her current and after acquired inventory. On January 3, 2010, ONB filed a financing statement in correct form with the proper office which described the collateral as “all the inventory of Gloria’s Depot.”
Sara, a customer, purchased a table for her law office for USD $900 cash from Gloria on January 13, 2010. A month later, Sara closed her office so she could move to Australia. Sara asked Gloria to put the table in Gloria’s store to see if any of Gloria’s customers would be interested in buying it from Sara for USD $1,000. Gloria agreed and Sara placed the table in Gloria’s showroom. Sara agreed to pay Gloria 10% of the sales price if Gloria sells the table.
On February 15, 2010 Gloria purchased an oriental rug from Tom on credit for USD $3,000. Gloria intended to use the rug in her showroom to help display a new line of oak desks. Gloria signed a security agreement giving Tom a security interest in the oriental rug and in all the rest of her office equipment and furnishings, which included an autographed portrait of Davy Crockett. On February 20, 2010, Gloria sold Maude, a customer, an antique roll top desk she had in inventory.
On February 22, 2010, Willy had the sheriff levy upon all of the assets of Gloria’s business to satisfy a USD $50,000 judgment he had obtained against Gloria after Gloria did not repay an unsecured loan. On March 1, 2010, Tom filed a financing statement in the proper office which covered the oriental rug, the office equipment and furnishings, and the portrait of Davy Crockett.
Gloria opened a furniture business with the help of a loan from the ONB. She gave the security interest of all the inventory of the business to the bank. In addition to this, the company has taken a rug from Tom and gave him the security interest of the furnishings and the equipments of the store. In this course a customer purchased a table and then gave it back to Gloria to sell it again to a third party. He demanded a commission of 10% on the sale. The situation throws up various possibilities on the possession of the goods. This can be discussed as follows:
A. The office table: Gloria had entered into a contract with the bank that all the inventories after the contract will be the property of the bank. In this case, the table is a form of inventory of the shop and the security lies with the bank.
B. The oriental rug: The oriental rug is a part of the office furniture. The office furniture is the possession of Tom as per the contract. It is not the inventory of the business and thus cannot be the property of the bank. In addition to this, the rug has been the property of Tom earlier. The security lies with Tom.
C. The portrait of Davy Crockett: The portrait will be the security of Tom as it is not an inventory. It is a furnishing item and a contract has been made regarding it with Tom. D. The antique roll top desk: This may be a furnishing item or an inventory. If this is a furnishing item the security lies with Tom while the bank will have the security in the case of an inventory. (UCC: Uniform Commercial Code, n.d.)
Big Auto Sales hired Expert Repo to repossess a Subaru Forester automobile owned by Maria who was in default on the associated promissory note. Expert Repo assigned the job to its field manager, Paul, and gave him an address where the vehicle could be found. On the morning of February 6, 2010, Paul went to the address and saw the automobile. Paul left the address to buy a soda and a Slim Jim from the nearby 7-11 store. Unseen by Paul, Maria left the house and helped her two sons, ages ten and six, into the back seat of the Subaru for the trip to school. As Paul was returning to the house, Maria ran back into her house to pick up her cell phone.
After Paul saw Maria run into the house, it took him only thirty seconds to back his tow truck to the Subaru, hook it to his truck, and drive away. Paul did not know that the two children were inside. When Maria emerged from the house, the Subaru, with her children, was gone. Maria began screaming, telephoned 911 [same as the Australian 000], and called her husband at work to tell him the children were kidnapped.
Meanwhile, on an adjacent street, Paul stopped the tow truck, got out, and heard a sound from inside the Subaru. Looking inside, he discovered the two children. After he persuaded one of the boys to unlock the vehicle, Paul drove the car back to Maria’s house. He returned the keys to Maria, who was crying outside her house. By the time emergency personnel and Maria’s husband arrived, the children were back home and Paul had left the scene.
In this case, Maria owed a sum of money which was used for the purchase of a car. The company now wants the car back and hired Paul for the job. When Paul took away the car, it had Maria’s children in it. Maria panicked and called the authority alleging that her children had been kidnapped.
Paul acted as per the law as the obligator in this case. Maria cannot act against improper repossession against the company as they acted under the law. The company had the security agreement of the car and they can take the repossession of the car on due date. The due date arrived and Paul took the repossession. This case depends on the notice served by the company. If the company did not give notice to Maria, then it cannot repossess the car. (UCC: Uniform Commercial Code, n.d.)
Octopus National Bank was impressed with your advice in Question One and thus has also hired you to advise the CEO on some commercial paper issues confronting ONB. ONB is considering the purchase of several promissory notes and drafts. However, the CEO is concerned that ONB might not be able to obtain the protection of holder in due course status because the instruments may not be negotiable.
The holder in due course will be the person or the company in the middle of the transaction path as depicted in the diagram below: Source: USA Commercial Law at La Trobe, n.d. In this case, the bank does not want to hold the instruments as it may not be negotiable. The situations are depicted below for which the advice has been asked for:
The note does not have a handwritten signature. Instead, the maker’s signature was computer generated: In the case of a negotiable instrument to be valid there should be the actual handwritten signature of the payer. The note contains the statement, “I promise to pay to the order of William Bell USD $1,000 if I make the highest mark in USA Commercial Law at La Trobe University during the Winter 2010 term.”: This conditional statements are not allowed in the case of the negotiable instruments. The note contains the statement, “This note is subject to the contract I signed with the payee, Paula Prince, on May 1, 2010.”:
This is not allowed as in the case of the negotiable instruments, any thing underlying another contract will not be valid. The note contains the statement, “This note is in payment for a Sony television which I have purchased from the maker.”: The name of the receiver of the payment has to be mentioned in the negotiable instrument to make it valid. The note contains the statement, “This note is payable from the proceeds of my 2011 cotton crop.: This is accepted as it depicts the limitation of the payment.
The note provides “for interest at 2% above the United States prime rate of interest.”: This is allowed as in this case the interest rate is determined by way of the contract. The note provides that “payment must be made in Euros; United States dollars or other currency is not acceptable.”: This can be acceptable as the money to be paid in terms of the currency is written here. The note provides that “the maker hereby reserves the right to extend the due date by whatever period of time the maker determines to be financially advisable.”: This can be acceptable as the payment period can be accepted by way of the contract.
A check is payable to “The weather is nice today.”: The negotiable instrument needs the name to whom the payment will be made. In this case, this is done and this is acceptable. This may not be negotiable by the third party.A check states, “Pay to Walter Bishop.”: The negotiable instrument needs the name to which the payment will be made. In this case, this is done and this is acceptable. This may not be negotiable by the third party. (MASTERING NEGOTIABLE INSTRUMENTS ,2008; USA Commercial Law at La Trobe, n.d.) Question Five
On June 1, 2010, Joan Maker issues a negotiable instrument payable to Harry Seller on July 1, 2010 representing the purchase price of goods Maker has bought from Seller for use in Maker’s business. The goods were faulty and there was a total failure of consideration. On June 15, 2010, Seller negotiated the instrument to George who takes as a holder in due course. On July 10, 2010, George gives the instrument to his nephew, Sam, as a birthday present. Sam presents to Maker for payment and Maker refuses to pay because of the faulty goods. Accordingly, Sam sues Maker.
In this case, Sam is the holder in due course. The instrument has been negotiable and the instrument has been passed on to the Sam. In this case Sam falls under the purview of the holder in due course. Maker would win the lawsuit as the goods were supplied to Maker under no consideration. The absence of consideration turns the contract void. The lawsuit would ultimately be directed to Maker and he will have to pay up for the faulty goods. Question Six
Adam signed a check in the amount of USD $500 drawn on his account at Octopus National Bank (ONB) payable to the order of “Bill and Betty” to pay them for cleaning his large house. A few days later, Bill purchased an antique camera from Dan and gave Dan the $500 check as payment for the camera. Bill indorsed the check as follows, “Pay to Dan” and then signed his name. Betty did not indorse the check.
Dan deposited the check into his account at Calamari State Bank (CSB). CSB credited Dan’s account and forwarded the check to ONB for collection. ONB refused to honor the check and returned it to CSB. CSB then debited Dan’s account for USD $500 and returned the check to Dan.
In this case ONB properly refused the rights of the cheque as Betty did not indorse the cheque. In the case of two parties to the cheque both have to indorse it. Yes the bank did the right thing in debiting Dan’s account as the cheque has not been cashed at ONB.
Dan has the right to sue Bill as the cheque has been dishonored. However, one thing may hold against Dan as it was his duty to properly check the instrument before forwarding it to the bank. Dan does not hold any right against Betty as he does not hold any connection with the negotiation. The onus is on Bill in this case as Betty is perhaps not informed about the negotiation. Dan has no right against Adam as Adam negotiated the cheque earlier and he dispelled any relation with the negotiable instrument. USA Commercial Law at La Trobe, n.d.) Question Seven
Stan owed Julia USD $42,500 for the purchase of equipment for Stan’s business. Stan gave Julia a negotiable check payable to Julia for USD $42,500 drawn on Octopus National Bank (ONB) in satisfaction of that debt. A thief stole the check out of Julia’s desk at her office, indorsed the check by signing Julia’s name, and cashed it at Calamari State Bank (CSB). Immediately after the check cleared, Stan closed his account at ONB because ING Bank offered him a better suite of banking services.
Elroy Electronics owed Julia a rebate for $USD 3,500 and mailed her a check payable to Julia for USD $3,500 drawn on ONB. Elroy mailed the rebate check to the wrong address. An unknown person indorsed the rebate check by signing Julia’s name and cashed it at ONB.
In this case, ONB does not owe Julia anything. Julia cannot proceed against ONB because the bank worked under the law by accepting the cheque and honoring it. If ONB is liable to Julia, the bank cannot owe anything from CSB as CSB worked under the rules by accepting the cheque.
If Julia has an underlying contract separate from the cheque, the contract would have come to an end with the payment of the cheque. In this case, Julia cannot proceed against Stan. No, Julia cannot proceed against ONB as the bank cleared the cheque under the rules and regulations. In the case of Elroy Electronics, Julia can proceed because it is the company’s fault where it was mailed to the wrong address. It is the duty of the company under the law to deliver the right goods at the right place. In this case, Elroy Electronics is liable. References:
NOWKA, R. (2009). MASTERING SECURED TRANSACTIONS (UCC ARTICLE 9). Carolina Academic Press. MASTERING NEGOTIABLE INSTRUMENTS (UCC ARTICLES 3 AND 4 AND OTHER PAYMENT SYSTEMS) (2008). Carolina Academic Press. UCC: Uniform Commercial Code. (n.d.). Cornell University Law School. Retrieved on 18th July, 2010 at: http://www.law.cornell.edu/ucc/3/article3.htm#s3-605 USA Commercial law at La Trobe. (n.d.). La Trobe University. Retrieved on 18th July, 2010 at: http://www.professorbeyer.com/Commerical-Law/GBL.htm