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.