Secured Transactions Exam

Note that the secured transactions law changes and the model Secured Transactions Exam answers may or may not be correct. Use at your peril.

Professor Frost Open Book Exam
July 8, 1998

Question 1 Secured Transactions Exam 30 Minutes
You represent XYZ Corporation. XYZ has just received a letter from Friendly Finance Company that states that Debt Co., one of XYZ's suppliers, has assigned its accounts to Friendly. The letter demands that XYZ pay to Friendly any and all amounts that XYZ owes Debt Co. immediately on receipt of the letter. The purchasing agent of XYZ called the sales agent at Debt Co. to inquire about the situation. The Debt Co. agent said, "Don't pay those guys anything. Keep sending your checks to us."
XYZ has received an invoice from Debt Co. In the amount of $100,000 for goods received last week. XYZ is planning on terminating its relationship with Debt Co. because the quality of the goods they have been supplying has been deteriorating rapidly. A shipment that they recently received and paid for was completely unusable. They have not yet examined the more recent shipment. Advise XYZ.

Question 2 Secured Transactions Exam 30 minutes
On April 1, 1998, as security for a $1 million loan, Fairmont Farms granted a properly perfected security interest to Big Bank in "all racing horses, proceeds, products, and all purses now or hereafter received by Fairmont." On May 1, 1998, Fairmont filed a bankruptcy petition. On June 1, 1998, one of Fairmont's mares, Fast Fanny, gave birth to a foal that everyone estimates is worth $100,000. Fast Fanny was owned by Fairmont continuously since before the security interest was granted.
The birth was a difficult one and unfortunately Fast Fanny died. Big Bank estimates that Fast Fanny's value was $10,000 on the date the bankruptcy petition was filed. Documents filed by Fairmont in the bankruptcy case show that during the first month of the case, Fairmont expended $10,000 to feed and care for its 10 horses and $4,000 on veterinary bills for Fast Fanny (which amount included the birth). You represent Big Bank who would like to know whether their security interest extends to the foal.

Question 3 Secured Transactions Exam 15 minutes
Your client, Gina Gibson, was recently served a summons and complaint filed by Friendly Finance Co. The complaint seeks a $100,000 deficiency judgment against Gina based on a guaranty that Gina executed in January 1997. Under the guaranty, Gina guaranteed all of the obligations and liabilities of her brother, Don, to Friendly Finance. Don obtained the $100,000 loan to open a bait shop on the Missouri River. Friendly Finance Co's loan to Don was secured by all of Don's "now existing and hereafter acquired accounts, inventory, and equipment." Your subsequent investigation revealed that Don defaulted on the loan on September 1, 1997 and that Friendly Finance obtained possession of the property by writ of replevin on September 20, 1997. Friendly Finance held an auction of its collateral on September 22, 1997 after posting signs on telephone poles around the area of the shop. Friendly was the only bidder at the auction and obtained the property for $5,000 (which amount covered only the expenses of the sale and the interest outstanding on Don's loan). Gina told you that she had a falling out with Don and knew nothing of his financial difficulties or the actions of Friendly Finance.
Assess Gina's defenses to Friendly's lawsuit.


Question 4 Secured Transactions Exam 15 minutes
You represent Big Bank who is considering making a loan to Edgar's Egg Farm, a Jefferson County, Missouri farming operation owned by Edgar Eggelston. You ordered a U.C.C. search against the name Edgar Eggelston in the Jefferson County Recorder's office and the search has not shown any filings other than the one you filed. Your filing shows the debtor's name as "Edgar Eggelston" and describes the collateral as "all now existing and hereafter acquired chickens, eggs and egg products."
The bank will only make the loan if it can be sure that it has a first priority security interest in all of Edgar's chickens and all of the eggs and egg products produced at the farm. Edgar sells about half of his eggs in bulk to local dealers. The rest he cleans, packages refrigerates and sells to customers at Edgar's Egg Emporium, a retail warehouse he operates on his farm.
Can you assure the bank that it will have a first priority, perfected security interest in the collateral?

Question 5 Secured Transactions Exam 15 minutes
On May 1, 1998, Bank and Debtor, a corporation headquartered and incorporated in Missouri, entered into a financing agreement pursuant to which Bank loaned Debtor $100,000. The agreement contained the following provision: As security for the obligations of Debtor under this agreement, Debtor hereby grants a security interest to Bank in all of Debtor's now existing and hereafter acquired equipment.
Bank filed a proper financing statement with the Secretary of State of Missouri. On June 1, 1998, Debtor purchased a drill press from a California manufacturer and sent its truck to pick it up. Debtor's truck picked up the drill press in California on June 15, 1998, and started toward Missouri. On June 17, 1998, as the truck was passing through Colorado, Debtor filed a petition under the United States Bankruptcy Code. May Debtor's bankruptcy trustee defeat Bank's security interest (if any) in the newly purchased drill press?

Question 6 Secured Transactions Exam 15 minutes
On October 1, 1997, Bank and Debtor, a corporation headquartered in Missouri and incorporated in Delaware, entered into a financing agreement pursuant to which Bank loaned Debtor $100,000. The agreement contained the following provision:
As security for the $100,000 loan made by Bank to Debtor hereunder, Debtor hereby grants a security interest to Bank in Debtor's now existing and hereafter acquired equipment. On October 2, 1997, Bank filed a financing statement (in the proper location) on which the collateral was described as "equipment, including the equipment listed on schedule A attached hereto." No schedule A was ever prepared or filed. On November 1, 1997, Debtor received a $50,000 loan from Finance Co. and granted Finance Co. a security interest in all of its equipment. On the same day, Finance Co. properly prepared and filed a financing statement. On November 15, 1997, Debtor borrowed an additional $50,000 from Bank. On November 25, 1997, before any payments were made to either Bank or Finance Co., Debtor defaulted on both loans. The equipment was sold for $125,000 and both Finance Co. and Bank claimed the proceeds. Who should get the proceeds and in what amounts?

Question 7 Secured Transactions Exam 30 minutes
On January 15, 1997, Manufacturing Co. borrowed $100,000 from Bank. Manufacturing signed a security agreement granting Bank a security interest in "all now existing and hereafter acquired machinery and equipment." The security agreement restricted Manufacturing from granting a security interest in any of its property to any other lender. On the same day, Bank filed a properly completed financing statement in the correct location that described the collateral as "machinery and equipment."
In early January, 1998, Manufacturing decided to expand its operations. On January 15, 1998, Manufacturing entered into a loan agreement with Finance Co. Finance Co. loaned Manufacturing $15,000 under the agreement. The Finance Co. agreement provided that $10,000 of the loan was to be used to purchase a new piece of equipment and that the remaining $5,000 was to be used for working capital. The agreement granted Finance Co. a security interest in all of Manufacturing's machinery and equipment and on January 15, 1998, Finance Co. filed a properly completed financing statement in the correct location.
Also on January 15, 1998, Finance Co. gave Manufacturing a check for $15,000 which Manufacturing deposited into its checking account the same day. Prior to the deposit of the check, Manufacturing's account had a balance of $1,000. On January 16, 1998, $1,000 in checks cleared the account. On January 17, 1998, Manufacturing made a cash deposit of $500 and wrote a check for $10,000 to the seller of the new piece of equipment and received the equipment. Manufacturing's bank paid the check the next day.
Manufacturing defaulted on its loan to Bank on May 1, 1998 and Bank obtained a writ of replevin on May 15, 1998. On May 16, the Sheriff served the writ and Bank now has possession of all of Manufacturing's equipment. Assess the competing claims of Bank and Finance Co. to the new equipment.

Question 8 Secured Transactions Exam 30 minutes
On October 1, 1997 First Bank loaned BigCo Manufacturing, Inc. ("BigCo") $10,000,000. The Security Agreement signed by BigCo in connection with this loan granted First Bank a security interest in "all of BigCo's now existing and hereafter acquired property and interests in property." This security interest secured the "Obligations," which the Security Agreement defined as all amounts owed at any time by BigCo to First Bank. First Bank filed properly completed financing statements covering the collateral in all correct locations.
On February 1, 1998, BigCo obtained a $1,000,000 loan from Finance Co. for the purchase of new equipment. Finance Co. made a search of the UCC records, which search turned up financing statements filed by First Bank. BigCo signed a promissory note in connection with the Finance Co. loan but signed no other documents. Finance Co. made the loan by check made out to BigCo and the equipment supplier, jointly. BigCo immediately encountered financial difficulties and failed to meet its obligations to Finance Co. Finance Co. filed a lawsuit and obtained a judgment against BigCo on April 1, 1998. Finance Co. gave a copy of the judgment to the sheriff on April 1, 1998 and the sheriff levied on all of the equipment in BigCo's possession on April 15, 1998. Because the equipment was unusually large, the sheriff levied by posting a notice on the equipment. This act was sufficient to create a lien on the equipment in favor of Finance Co. On May 1, 1998, BigCo's President called First Bank to request an additional $10,000,000 loan. During the course of the conversation, BigCo's President mentioned that BigCo had an outstanding judgment but told First Bank's loan officer that BigCo would work the problem out. No other details of the Finance Co. judgment were mentioned. BigCo received $5,000,000 on May 1, 1998 and $5,000,000 on June 15, 1998.
BigCo filed a bankruptcy petition on June 20, 1998. First Bank's claim against BigCo is $20,000,000. Finance Co's claim against BigCo is $1,000,000. BigCo's equipment was liquidated for $17,000,000 (net of all costs of administration and liquidation).

Secured Transactions Exam and Answer from the MEE

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