Uniform Commercial Code - Essay Example

Uniform Commercial Code Application of Article 9 Uniform Civil Code: Security interest: Category, and perfection of collateral 1. Land in Arizona which Massive Dynamics owns and uses to conduct product safety tests, would be considered part of the collateral in accordance with [UCC § 9-102(a)], under the heading of Accounts would fall under the category of collateral as defined by the Uniform Commercial Code, Article 9. It includes, more specifically “all property that has been or is going to be put up for sale, lease, license, or is going to be otherwise gotten rid of” [UCC § 9-102(a)(ii)].   2. The second collateral at hand is the crops growing on 100 acres of land in Kansas which Massive Dynamics actively farms to provide organic food for its employees. This would fall under the farm products category of collateral classification under section 9 [UCC s9-109(3)]. 3. The third item is a certificate for 20,000 shares of Massive Dynamics stock. This would fall under the ambit of certificated security, meaning a method of securing interest that is stands for a certificate. This has been defined as Security. Article 9 also identifies a category known as semi-tangibles where the right to payment or to goods is embodied in writing, which therefore attains I intrinsic value. In this case it is shares which are instrument [UCC s9-105(1)(i). 4. s9-102(a)(48) states that inventory means goods that are leased, held for being sold or being put up for lease, supplied in terms of a contract, raw material or materials used or consumed in a business. S9-102(a)(33) states tat equipment on the other hand is the catch all category for goods that are not consumer goods, inventory or farm products. This would mean that a Megalon Model NCC-1701compuyter would be equipment that the business uses for the conduct of work. 5. s9-102(a)(48) states that inventory means goods that are leased, held for sale or lease, furnished under a contract of service, raw material or materials used or consumed in a business. S9-102(a)(33) states that equipment on the other hand is the catch all category for goods that are not consumer goods, inventory or farm products. This again means that the air conditioning system, because it is installed in the factory is equipment [UCC s9-109(3)]. 6. A limousine which the President of Massive Dynamics uses to escort potential clients around its facilities. This would fall under the category of consumer goods. “Goods” denotes all stuff that could be moved when a safety interest attaches. The car by virtue of the fact that it is a movable item that is used by owner in the long term transportation requirements of the business would mean that it would be part of the goods aspect of the overall process.        Perfection is a the legal process by which secured parties protect themselves against the claims of third parties who may wish to have their debts satisfied out of the same collateral. Whether a secured party’s security interest is perfected or unperfected may have serious consequences for the secure party. Except to the extent other law preempts Article 9’s perfection rule. Usually, security perfection is accomplished by filling a financing statement, but in certain circumstances, a security interest becomes perfected without this statement actually being filed. Where or how a security interest is perfected sometimes depends on the type of collateral. For the purpose of security filling and categorization one could divide collateral into two basic types: tangible collateral (collateral that could be seen felt and touched) and intangible collateral (collateral that consists of or generates rights). Where cases of secured lending are concerned, the bank would have to show that it had right over the collateral, and this claim would have to have evidentiary support. In case the claim could not be correctly established then a borrower could at some point sell the security and leave the bank with no option if the terms and conditions of the loan were not met. The bank’s claim over the security interest would therefore be dependant on whether or not there has been the correct attachment and perfection of the security. For the security interest to attach, i.e. for it to be legally binding, three basic principles would need to be in force:  1. First, the borrower and the bank must have a written or oral (preferably a written) agreement that states that the bank has a security interest in the property; 2. Second, the bank must give something of value in return, for example, funds or a commitment to lend; 3. Finally, the borrower must maintain rights in the collateral either through ownership or through assignable rights Article 9 permits a security interest to be perfected in four principal ways: 1. by filing in the appropriate office a financing statement that identifies the debtor and describes the collateral 2. By taking possession of the collateral, which includes obtaining an agreement from a bailee of he collateral to retain collateral for the secured party’s benefit (s9-104, 9-105, 9-106, 9-107) 3. By taking control of the collateral, a term that is defined differently for different types of collateral and 4. Automatically simply by having the security interest attach. Automatic perfection could be for a temporary period, typically 20 days (s9-312(e), (f), (g), s9-315(c), (d), of it could even be permanent. For some kinds of security, the secured entity might perfect in only one of these ways. For other types of collateral, the secured party has the option of multiple ways to perfect, although the method used may affect the priority pf the secured interest. With respect to agricultural lien, the best method of perfection are laid out in s90308, where it is stipulated that except as otherwise provided in this section 9-309, a security interest is perfected if it has attached and all of the applicable requirements for perfection in Section 9-310 through 9-316 have been satisfied. A security interest is perfected when it attaches if the applicable requirements are satisfied before the security interest attaches. In case of the 10 acres of land in Arizona used for conduction of product safety tests, the best way of perfecting security would be by filing for a letter of control and attachment of the security interest. This could also be done by taking control of the documents providing for the ownership of the land. Land would be an account category of collateral meaning that it requires filling. It could also be attached automatically on the creation of the security interest, but the safest manner of collateral perfection in this case would be filling for perfection [UCC 9-301, 9-309(2) and (5)]. The crops growing on 100 acres of land, would be perfected by filing for and then by taking possession of the produce [UCC 9-102(a)(34). The idea here would be to file for security, but given the fact that the crops are grown for consumption of workers and not for sale in the market, filing for security would yield no benefit. The best manner of perfection in this case therefore would be to take possession of the collateral. A certificate for 20,000 shares would fall under the category of instruments and would be perfected by taking control of the shares. One has to understand the fact that except for temporary perfected status, filing or possession, could be the best manner of perfection in the case of an instrument [UCC 9-301, 9-309(4), 9-310(a), 9-312(a) and (e)]. The Megalon NCC-1701 computer and the air conditioning system, would be perfected by filing and then by possession. Finally, the limousine would also be categorized under the equipment bracket, but would be perfected by having the security interest noted on the certificate. Question 2: Priority over Collateral In case of an unperfected secured party versus and unsecured creditor, the unperfected secured party prevails over unsecured creditors who have obtained judgments against the debtor but who have not begun the legal process to collect on those judgments [UCC 9-201(a)].   1. In the context of this case, the idea inherent in the sale therefore is simple. When Gloria sold Sara the table, the inventory was secured as collateral against the loan that she had taken out against the entire inventory she owned. When Sara bought the table therefore, she bought the inventory and therefore it was the proceeds that would now form part of the security agreement. The table would now belong solely to Sara and not to Gloria’s inventory list given the fact that she sold it. However, when Sara asks Gloria to store the table all over again trying to see if anyone would buy it for $1000 it would be housed in Gloria’s furniture shop, not as inventory but as Sara’s asset that was being exhibited. However, if sold, the 10 per cent interest that Gloria would get would then form part of the security arrangement that Gloria had entered into with the Octopus National Bank. In the context of the question on the priority owner of the table, the it would remain Sara because she owned the table and had given to Gloria just to exhibit and had not sold it back, thereby nullifying any claims that the bank could have on the table itself. 2. In the context of the oriental rug, which is a case of the perfected secured party, versus the perfected secured PMSI, which is Tom, the one that would hold sway, is Tom, given the fact that First, Tom would fit the category of a PMSI and would thus get priority, providing it is perfected especially given the fact that the agreement had been perfected in twenty days after the debtor takes possession [UCC9-324(a)]. Also, he would have priority given the fact that there was proper agreement signed and the rug was sold on credit, before the time the debtor took actual possession [UCC 9-324(b)] 3. The portrait of Davy Crockett would belong to the one that would be the first to perfect the security agreement on collateral. The loan that Gloria took from the sheriff was an unsecured one, which means that treating the portrait as inventory, and given the fact that it had not been purchased but was part of a credit agreement, which would be annulled after Tom got the rug, the portrait would belong to the bank, in light of the fact that in an instance of conflict between a In case of a perfected secured party’s interest versus the unsecured parties and creditor, the law is clear on the fact that a perfected secured party’s interest has priority over the interests of most other parties, including unsecured creditors, unperfected secured parties, subsequent lien creditors, trustees in bankruptcy, and buyers that do not purchase the collateral in the ordinary course of business. 4. The antique roll top desk would belong to Maude given the fact that a buyer of goods in the ordinary course of the seller’s business-makes a case for the buyer over the secured party’s security interest, even if perfected and even if the buyer knows of the security interest [UCC 9-320(a)]. Repossession of Collateral Question Three   On a default, the secured party has a right to possession of the collateral. Sometimes, he debtor would voluntarily turn over possession (Martin and Hart, 2007).the idea in essence is that after default, a secured party has the right to reposess the collateral in the absence of judicial processes if this could be done without breaching the peace [UCCs9-601(a)(1), 9-609(b). the secured party may also reposess the collateral with the aid of a judicial process, such as by means of replevin or similar action, When the collateral is goods, Article 9 gives to the debtor two possessions:   1.      By simply taking the collateral; of this could be done without a breach of peace, or 2.      By bringing a court action. This is usually called replevin or simply an action for possession. When the collateral is in terms of intangibles, then a different procedure is used.   The term breach of peace ahs not been defined in the reviused version of Article 9, leaving to the courts to develop the scope of the phrease on case by case analysis. The most important restriction upon repossession is that there is the need for possession Actions such as repossession of keys and twisting of wrists [Pease v Havelock National bank, 351 F. Supp. 188(D. Neb. 1972)], running over debtor’s foot with a car and flashing of gun [McCall v Owen, 820 S. W.2d 748(Tenn. Ct. App. 1991)] and repossession of car while she was inside it [Sanchez v MBank of El Paso] have been considered breach of peace actions by the courts in the past. With respect to liability, however, there would be no delegation of liability of illegal repossession, given the fact that the law does not allow delegation in such cases [N.A. v. Sanchez, 836 S.W. 2d 151]. If the second party hires someone to reposses the property and the person during the act of repossession is liable for conversion of otherwise, the secured party would be held liable because duty not to breach of peace cannot be delegated [Robinson v Citicorp Nat’l Servs., Inc., 921 S.W. 2d 52 (Mo Ct. App. 1996]. In the context of this case therefore, Big Auto Sales, would liable in a court injunction, and Paul along with Expert Repo would be liable to tort law, along with kidnapping charges, if at all.  Topic 4: Negotiability of an instrument 1. An instrument in order to be negotiable would need to be in writing and be signed at any given place within the instrument. This signature could be in any form such as a mark or rubber stamp, which would then automatically purport as a signature and would authenticate the writing [UCC 1–201(39), [UCC 3–401(b)]. The idea therefore is that digital signatures, or a computer generated signature would not affect the negotiability of a document, given the fact that a computer generated sign is a wet signature and acceptable in negotiability terms (Beatty and Samuelson, 2007). Therefore, the instrument in this case remains negotiable. 2. The idea behind justifying the negotiability of an instrument is that the promise to pay must be unconditional, it should be an affirmative thought-more than a mere acknowledgment of a debt. Determining factor making an instrument become negotiable, it is essential that the instrument contains an unconditional promise to pay [UCC 3–103(a) (9)]. In this case, there is a problem because of the fact that the ultimate fulfillment of the promise to pay is conditional and is hinged on the debtor making the highest mark in USA Commercial Law at La Trobe University during the Winter 2010 term. This therefore renders the instrument non negotiable. 3. Where negotiability of a note is concerned it becomes essential that payment could not be subject to conditions, such as being governed by the stipulations of other writings, or for that matter be subject to rights or obligations stated in another writing [UCC 3–104(a), UCC 3–106(a)]. In the context of this case the fact that the note is susceptible to the terms and conditions of the contract as agreed upon with Paula Prince, would make the note non negotiable. 4. A prearranged amount of currency exchange is required for the note to be negotiable. This is applicable given the fact that the negotiability of a note is subject to the determination of an ascertainable amount from the face of the instrument [s3-104(a)]. Money is defined by the UCC as a mode of barter certified by a national or international government as element of its legal tender. This means in essence that the payment should be by way of currency or money. In the context of this case therefore the fact that the instrument of payment is the exchange of a Sony TV would mean that the note is non-negotiable. 5. A statement in the instrument that payment could be made only out of the funds or source would not render the instrument non negotiable [UCC 3-106(b)(ii). It has been stated in the judgment in the case of As the Farmers State Bank case that the effect of the farm products exception is to transform a buyer of farm products into a surety on the farmer's debt to the secured creditor. This would mean therefore that mean that a repayment by sale of crops clause does not make have an impact on the negotiability of the instrument, although there is a chance that if it looks commercially unviable it could be rejected 6. An interest rate higher by 2 per cent than the one allowed by the Federal Reserve makes the instrument susceptible to charges of usury, especially in light of the fact that state laws set up interest rate upper limits for a variety of credit schemes. The idea therefore is that an interest rate offered that is higher than the upper limit set by the Federal Reserve would make the note usurious and thus make the authority accepting suspect to criminal charges. In accordance with the principle of the UCC, variable interest rate notes could be negotiable though, given especially the fact that the fixed-amount requirement is applicable only to the principal [UCC 3–104]. This in this case, the fact that the note offers a rate of interest higher than the one decreed by the Federal Reserve would bear no impact on the negotiability of the note. 7. It is stated in UCC s3-104(a) that a preset amount of money would need to be ascertainable from the face of the instrument. Money is defined by the UCC as a mode of barter certified by a national or international government as element of its legal tender. In the context of this case, therefore the value consideration would be the conversion rates prevalent at the time of payment. In accordance with the statutes of the UCC, Article 9 there is nothing wrong with a note that offers payment in terms of a foreign currency. The fact that the payment would be made in Euro terms would therefore have no bearing on the overall negotiability of the instrument. 8. There is a requirement that the instrument must be billed on command or at an exact time, given the fact that it is only logical to defend the interest of the holder that there in order to determine the worth of the instrument he has an idea of the time at which he would be paid [UCC s3-103(a)]. It is stated in UCC that the instrument would need to be payable on or before a stated date or within a fixed period after sight, or on a date or time ascertainable at the time the instrument is issued [UCC 3–108(b)].The fact that this document registers no timeline whatsoever makes the instrument non negotiable. 9. An instrument needs to be payable to bearer or to order; this means that there must be a use of language indicating that the person in possession of it is entitled to payment e.g., to holder to cash or to the order of cash [UCC s3-109(a)]. In this context the mention of a weird name makes the instrument non negotiable. 10. An instrument needs to be payable to bearer or to order; this means that there must be a use of language indicating that the person in possession of it. The idea therefore is that it should not name a payee UCC s3-109(a)]. In this context the mention of a name makes the instrument non negotiable. Holder in Due Course: Answer 5 A) one finds the definition of the term holder in due course entrenched in UCC s3-302(a). This section defines the holder in due course as someone who would assume the position in cases when one is holding an “instrument” under Article 2, which in accordance with s3-104(b) means a negotiable instrument. To be a holder in due course the holder must, among other things, take without notice that the instrument is overdue, has been dishonored, or that any person has a defense or claim to it (Whittington and Delaney, 2008). The idea behind the concept of a holder in due course has been the protection of third party liability in cases where the party has entered the deal without knowledge of the pervious holder’s actions. The idea inherent and a prerequisite that of being a holder in due course remains that the person be acting in good faith, without knowledge of any obvious imperfection in the instrument nor any notice of dishonor. (UCC 3-302). The idea therefore is that a holder in due course is a person that for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it becomes payable and without having sufficient cause to believe that any defect existed in the title of the person from he derived his title. Accordingly then it would figure that a person who receives a negotiable instrument, without consideration may not be deemed as a holder in due course, but merely a holder thereof. Accordingly, if a negotiable instrument is just transferred to holder, who then takes it without any consideration, would not be entitled to enforce his claim as stated in the note. In the context of this case, therefore Sam would not be considered a holder in due course but just a holder. B) It needs to be understood that given the fact that Sam does not have the position of a holder in due course would mean therefore he would not be insulated against in accordance with the defenses that are ordinarily bestowed on a holder in due course. Sam being just a holder, his position would be similar to that of Seller in case maker had reengaged on the deal citing defective products. The idea therefore is that given the fact that the goods were defective, Maker would be seen as being justified in a court of law where the defense for not coming up with payment is concerned. This would then also mean that Sam would now lose the case because Maker would have the defense that he did not owe Sam anything especially given the fact that the quality of the goods sold to him was inferior, faulty and there was a total failure of consideration.  Question Six: Joint Bank account 1. A check is “draft … payable on demand and drawn on a bank ….” (UCC) § 3-104(f), In this case, when Adam gave supplied a check jointly to Bill and Betty, he created an unrestricted joint check agreement, which would require that the ones responsible for the money would have to pay by joint signatures all future payments (Cushman and Myres, 1999). The check presented to Bill and Betty and in their account was used as jointly would hold legitimacy only when a withdrawal claim would have both their signatures. 2. In accordance with S4A-403 of the UCC, the payment of the sender’s obligation under S4A-402 to pay the receiving bank occurs when the sender is a bank and the payment occurs when the receiving bank receives final settlement of the obligation through a Federal Reserve Bank or through a fund transfer system (Cooper, 2005). Because ONB refused to honor the check and the fact that at the end of the transaction, there was no available balance in Dan’s account, CSB was correct in debiting the amount. 3. There could be criminal and a civil law suit that could be filed in this case by Dan against Bill. Intentional deception would be a consideration. One state court of appeals has taken the position that, if the corporate signer was aware that there were insufficient funds and intended to defraud, he could be held responsible. Finally, Dan as the creditor could ask for three times the amount payable earlier as settlement in a civil injunction case. 4. In this case, the liability for the transaction would fall solely with Bill and not with Betty given the fact that it was not a joint purchase of the camera by Bill and Betty. Betty would be free of responsibility where the liability for the bad check is concerned. 5. Adam would have no liability because his duties of payment would end the minute he signed a check to Bill and Betty and the payment for the same was cleared. Further transactions on the amount would rest solely with Bill and Betty (UCC s4-103). Question 7: Stolen Instrument 1. If Julia failed to act as a reasonable consumer then the bank is off free, but in case that does not happen, then the bank is not free of liability, given the fact that the payment that the bank made was in good faith. 2. In this case the definition of the obligated bank would come into the picture given the fact that it is the bank that is the issuer of the cashier’s check or teller’s check or the accepter of the certified check that is to be held at fault for the problem. 3. There is no claim against Stan that Julia could bring because the check that he gave was clear with enough money in the account. When the check changed hands, Stan’s liability was to ensure enough money in the bank. 4. Julia can bring an injunction against Elroy for having mailed her money to a wrong address, given the fact that she did not get possession of the check at all. Reference: Whittington, O. R., and Delaney, P. R., (2008). Wiley CPA Exam Review 2009: Regulation. John Wiley and Sons. P214 Mathur, S., (2010). Trans Auto Engines Systems. Tata McGraw Hill. p329-331 Uchtmann, Bauer, J. A., and Dudek, A. M., (1985). ‚The UCC Farm Products Exception –A Time to Change’. University of Arkansas ท School of Law ท Division of Agriculture. MINN. L. REV. 69. p1315 Mears, P., E., (2004). Strategies for secured creditors in workouts and foreclosures. American Law Institute-American Bar Association Committee on Continuing Professional Education. Pp154-156 Cooper, C., (2005). The portable UCC. American Bar Association. P160  LeRoy. M., and Jentz, M. A., (2007). Business Law Today: The Essentials. Cengage Learning. pp484-486 Nowka, R. M., (2009). Mastering secured transactions (UCC Article 9).Carolina Academic Press. Chapter 24 - Negotiable Instruments Notes. Retrieved August 10, 2010, Read More