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COMMERCIAL LAW

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INTRODUCTION

This entirely gives an in-depth description of the relationship between debtors and creditors and how security interests can be sufficiently perfected. Consequently, different cases have been projected together with the case problems and an attached supported personal opinion in each case to portray understanding.

I. BANKRUPTCY

Bankruptcy is a legal term used when an individual or other entities are unable to repay their debts. In the United States of America, a bankruptcy reform Act of 1978 was passed by congress[footnoteRef:1]. There are four main types of bankruptcy: a debt repayment plan for individuals; a reorganization proceeding for businesses; straight bankruptcy; and reorganisation proceedings for farmers. Majority of bankruptcies are straight bankruptcies, and individuals file a more significant percentage of them compared to businesses. In straight bankruptcy, the debtor files a petition with the federal court under the guidance of the local federal district court. The date on which the petition was filed is of considerable significance since it measures moment for the majority of the bankruptcy code’s sections. Together with the petition a list showing assets and creditors are filed by the debtor. Then the creditors are summoned to a meeting where they elect a trustee who collects all the properties of the debtor. [1: U.S.C § 101https://avemarialaw.libguides.com/c.php?g=265710&p=1777316]

II. PRE- CODE SECURITY DEVICES

Case (1) Benedict vs. Ratner

In involuntary proceedings conducted on September 26, 1921, following orders by the federal court for southern New York, the Hub Carpet Company was declared bankrupt. Benedict was the appointed trustee trusted to collect the book of accounts for the company. In the court petition, Ratner filed a case underwriting gave on May 23, 1921, claiming for the accumulated amount of money to be paid to him. As a result, the company intended to direct to him indirectly loans for all existing and future accounts. Benedict stood against the petition on claims that the original assignment was null thus considered as a fraudulent conveyance according to the law of New York. Also, he filed a cross-petition which demanded Ratner to pay to estate all amounts that were made to him after September 17. Consequently, the company went insolvent and Ratner had reasons to believe. After the date of the original assignment, the accounts had seemingly been won by the company. Both petitions made were decided in Ratner’s favor by the District Judge. He dismissed the assignment conducted in May by declaring that it was not a fraudulent law. He supported that the assignment developed equity towards the future acquired accounts. As against the bankrupt’s estate, Ratner was entitled to retain because of the said equity. The follow up of the accounts which had been taken by the company in September and turned over to him settled a perfect title to the remaining accounts which were against the unexpected bankruptcy (Pre-code security device, pg 1016)

Case Problem:

To relate the above problem with a similar between Honest John and Nancy. John sold Nancy Debts a used car at $900, which was to be paid in three instalments of $300. The contract was orally made. Consequently, it happened that Nancy missed did make the second payment as earlier agreed, and one of John’s employees decides to repossess the car and gave it to the seller. As a result of that, Nancy decides to Sue John for conversion which creates a dilemma about who should win the case.

In my opinion

The unpaid seller has no right to repossess a good. The repossession can only happen under specific conditions that, if the buyer has particularly permitted the seller a security interest in the sold item and when the seller sues, recovers judgment as part of the seller’s judgment. Only under these circumstances that should happen.

However, to settle the problems encountered in the case, the creditor was to be permitted to acquire physical possession of the property. Although, the acquisition of the physical property was only possible where the debtor had a visible property. Below is a significant device that gives a summary on the possession of the property by the creditor.

A. Pledge

In this, the debtor hands over his physical properties to the creditor until the agreement for the pending debt is fully settled. Upon the possession of the debtor’s properties, guarantees the creditor to enjoy interests in the collateral. For instance, in the case where the creditor gets to possess a gold ring as a form of pledge then it is clear to everyone that the creditor will gain some legal interest in that. Pledge is a better way of securing the interests of the creditor[footnoteRef:2]. However, two challenges are associated with pledging one of them being that in some collateral the debtor is allowed to have possession over some of his properties. The second challenge is that items to be pledged are those that exhibit tangibility. [2: ]

B. Chattel Mortgage

In this, the mortgage issued to the creditor by the debtor is put under record in an assigned place and published under the name of the debtor to create awareness to other potential creditors or if other creditors load the mortgage.[footnoteRef:3] Therefore, the debtor is allowed to have possession as opposed in the case of Benedict V. Ratner where debtor’s possession was ignored since the property was allowed to be repossessed by the creditor for public interests of the company. [3: ]

C. Conditional Sale

The conditional sale causes problems to the case concerning Benedict v. Ratner. In this, the creditor’s possessions are considered as nothing and treated as security interests by the creditor in which when the debtor lost the case to the creditor, then the creditor can freely possess the debtor’s properties which perfects creditor’s security interests. Also, the condition in conditional sale states that the buyer cannot get full title over a good if the payments are not made in full.

D. Trust Receipt

It was utilized towards financing the acquisition of inventory items apart from automobile goods such as vehicles. The receipt was valid only where the inventory comprised of separate items that were easily identified. Examples of inventory items include items that have serial numbers.

E. Factor’s Lien

The factor is considered as a finance entity that loans money against a manufacturer which in this case is put up as the collateral. Lien is a form of security interest.

CONSIGNMENTS

A true consignment is a marketing procedure where the owner of certain goods consigns them to a retailer for sale in public. The goods are returned to the owner if the retailer is not in a position to sale them. In circumstances that the retailer is the selling agent for the owner of the goods (consignor), then the retailer remains responsible for selling the goods. However, in cases where the goods act as a reservation of a security interest and the retailer does not pay for the goods, then the goods can be reclaimed if the retailer does not pay for them. Although the consignor is the original owner of the goods, the retailer may also appear to be the unchained owner. In this case, the creditors have no right to access whether a collateral item is held on consignment.

Case (2) In re Fabers, Inc (1972)

On May 31, 1971, Mehdi Dilmaghani & Company, Inc. placed oriental rugs to the bankrupt on consignment. On a similar basis, there was a subsequent submission of rugs that were made six times in the same year, 1971. All the shipped rugs had an identified attached label. Efforts relating to security interests in complying with the provisions of the uniform commercial code were not made. The true consignment allowed the dealer to claim ownership of the rugs although the dealer was not affirmed a security interest in the rugs. Therefore, the consignment of the dealer was not subjected to the provisions of the code related to security issues.

The claims of the dealer on the consignment is was not intended for security interests. In the agreement, the rugs were identified as being under the ownership of the dealers, but the risk of damage was on the retailer. Evidence was submitted before May 1971, and that the dealer did not get involved in oriental rugs. As it has always been known that the bankrupt is mainly identified by the ability of his creditors to be considerably involved in selling the goods that were owned by other people. The dealer further debates that the oriental rugs were not engaged in bankrupt deal. They were of similar size although they might not possess similar qualities in terms of price range as far as other carpets and rugs sold by the bankrupt are concerned.

The bankrupt had a trading name known as “Faber’s world of carpets.” Any possible connection with the dealer was not projected in any form of newspaper advertisement. There were projections that the members of the Oriental rug dealers association were associated with the tendency of selling their rugs on consignment. No evidence was there to prove the universal invariable practice in the trade (Consignments pg 1029).

Case Problem (s):

In a case related to what has already been detailed. In this, it involves an artisan by the name Luke Skywalker, he creates a large jeweled and decides to take it down to Weapons of the World (WOW), which it was an organization that dealt with sold items either manufactured by itself or bought from other dealers. Skywalker’s sword was estimated to be worth $25,000 or even more. Luke asked the organization to sell the item for him. Before

In my opinion

Before Luke makes that attempt of asking the organization to the sell the item on his behalf. He first has to follow steps that will help protect himself from WOW’s creditors who have an interest in the store’s inventory if there is any.

Case (3) In re Troupe (2006)

This case summarised a judgment that was issued to determine if debtor’s tractor is identified as a consumer good and that the defendant has a purchase money security interest. If it happens, then the security interest of the defendant is perfected although the defendant did not make any attempt of filing a financial statement. If it is not, then the security interests of the defendant are considered not perfected and are projected to be ignored. However, the court rules that the tractor was consumer goods and that defendant has a perfected security interest since representations in the security agreement relating to the debtors aimed at a personal use tractor. In an attempt to bring the action against the defendant, according to the bankruptcy code in section 544, 549 and 550[footnoteRef:4], there was seek to prevent Deere’s security interest in the tractor. According to the trustee, he confirms that Deere admits that if he fails to file a financing statement, it will render him to unperfectly acquire money security system. The trustee affirms that the tractor was not consumer goods and it was mainly intended for business not personal purposes (Classifying the collateral pg 1060). [4: U.S.C. § 544, 549 and 550 http://www.ecases.us/case/okwb/c1851996/in-re-troupe]

Case Problem (s):

A company by the name passport credit card company issued millions of credit cards internationally, and sent them to cardholders. The cardholders used the cards in several transactions with merchants. The resulting paperwork would be sent for reimbursement to the passport company by the merchants. In this case, the passport company needed to know if its possible for them to use the credit and transactions as collateral.

In another case, Mercy hospital is fond of receiving patients who come from various health plans who sign in paperwork to authorizing hospitals to seek payment from their respective health insurance coverage providers. The hospital usually receive many such cases. Section 9-102 (a) (46) is yet to determine if the hospital can borrow money and use the money from various health plans as collateral.

In my personal opinion:

From different cases, I think it’s high time for companies to determine the kind of collateral classifications the company’s assets belong before taking any cause of action.

Morgan County Feeders, Inc. V. McCormick (1992)

Allen engaged in an agreement with James McCormick to sell 56 cattle that Allen possessed. In favor of Morgan county feeders, the cattle were subjected to perfected security. The inventory which was the item sold in the ordinary course of business act as a perfect security interest to the buyer. In regards, McCormick argues that the trial court made a mistake of establishing that the purchased cattle by Allen were considered as equipment instead of inventory. However, according to the institution, under the act of Uniform Commercial Code, goods are characterised as all movable things. Goods have been categorically classified which include; inventory; consumer goods; equipment; and farm products. In this case, the involved party concords that the mentioned cattle belonged to the category of “goods” as classified under the Uniform Commercial Code. Additionally, they agree that the cattle are not “farm products.” Therefore, what seems like a major issue was the arguments of whether the cattle should be categorized as being equipment or inventory.

According to section 4-9-109 (2)[footnoteRef:5], goods are defined as equipment only if they are ought or used primarily for business. In contrast, another section states that goods can be considered as inventory if they are handled by a person whose purpose is to lease or sell them. The classification of cattle as equipment instead of inventory is considered as not being logic. Also, the presented evidence in the court exhibited abnormal situations, which draws us to the conclusion that the user records were in support of the court’s classification of goods. [5: U.S.C. 4-9-109 (2) https://casebriefsco.com/casebrief/morgan-county-feeders-inc-v-mccormic]

Allen attested that his reason for buying the cows was to use them during cattle drives and that the cows have a defined comparatively long period of use in contrast with the Rodeo Calves and Cattles. Although the court disputed McCormick’s point that the purpose of the purchased cows was only for Rodeos, under these circumstances, it did not slip that the cows should have been classified under equipment. However, in the ordinary course of business, the trial court made a mistake to identify McCormick as not being a buyer (The creation of a security interest pg 1068).

Case Problems:

This involved a lawyer by the Sam Ambulance; he loved risky investments. A musician by the name Elvis Presley passed on, and Ambulance acquired one of the musician’s guitar. He decides to have it for a couple of years and until its value appreciates. He intends to use the guitar as collateral to request a loan to run his law practice.

In another case, in favor of the Total Finance Company, Peter Poor signed a security agreement and financing statement which gave the company a security interest by giving them access to all the personal property that the debtor owned. To determine if that defines a perfect interest section §§9-108 and 9-504 will help solve that[footnoteRef:6]. [6: ]

In my own person opinion:

I support the idea of the creditor to file a financial statement as a security of interests to avoid conflicts in future in the event where the debtor fails to meet all the loan payment agreements.

In re Grabowski (2002)

In this case, it involves a dispute between defendants Bank of America and South Pointe Bank concerning their security interests in three items of farm equipment possessed by the debtors. Both of the involved lenders perfected their interests by filing financial statements. Bank of America was the first to file and defined its collateral in general terms with the business address of the debtors listed instead of their home address where the collateral was situated. In contrast, South Pointe was more specific on the collateral, and it included the home address of the debtors. However, South Pointe claimed that the Bank of America’s description was not effective to be termed as perfect in terms of a bank’s security interest in the equipment. While, South Pointe, projected a superior interest because of its consistently filed financial statement.

The facts remained undisputed. Debtors, Ronald and Trenna Grabowski of Dubois filed chapter 11 proceeding to set up their farming operation in Washington and Perry counties, Illinois. For about 30 years the debtors have engaged in farming in this location, Illinois.

The schedule of the debtors included a list of items of equipment used in the operation of the farm. They filed a present proceeding to establish the priority, validity and the degree of liens managed by different lenders in this equipment.

Bank of America earlier claims security interests in this equipment by moral excellence of a security agreement signed by debtors in 31st, December 1998. The statement filed by the Bank identified the debtors as Ronald and Trenna Grabowski together with their address as “12047 State Highway #37 and Benton, Illinois 62812” respectively. On the other hand, South Pointe afterwards acquired a lien and filed its financial statement in 18th, January 2000 and identified the debtors as Ronald and Trenna Grabowski together with their respective address.

For all the reasons stated, the court resolves that Bank of America financing statement was entirely sufficient in terms of its security interests in the subject farm equipment, and that being that the Bank had filed their case in time was said to be superior to the case of South Pointe. The court rules the case in favour of the Bank of America and against South Pointe (Technical validity of the forms pg 1090-1092).

Case Problem (s):

A related case was witnessed between Jeanne Angell and Richard. In this case, Angell sold 20 cows to Baker, known as a dairy farmer. Each cow that Angell possessed had a certificate if registration issued by Holstein Association. Each certificate contained the name and the sketch of the cow and other special features that the cow had. Some certificates that were offered included items such as identification numbers and ear tags. For the unpaid price, Baker gave Angell authority over the cows as security authority. Later it was realised that only four among the cows had ear tags with numbers that coincided with the financing statement. The rest of the cows had numbers which did not match with the records in the financial statement. Anyone who signs up for credit there is usually a stated agreement containing a clause that states “Cardholder at this moment grants the issuer a security interest in all goods purchased on your account”. A great question to pose is if the statement clause can adequately describe the law books subsequently bought with credit.

Also, another problem involved Polly Travis who possessed a clothing company that was making good sales. Due to the right amount of sales, Travis decides to open more stores around the state. She took a loan from State Bank to expand her business. The bank took account of all the tangible items owned by her. As though that was not enough, the bank made her pledge one of her most expensive collection of jewellery to the bank. After 12 months, she requested the bank to have the jewellery collection bank so that she could put it on to an event. Before she returned the jewellery to the bank, another creditor collected it through a judicial process (Page 1095, Problem 318, Paragraph 1).

In my own opinion:

I think that it is right for a creditor to repossess the property of a debtor as a security interest if judicial processes have been observed.

References:

Benedict v. Ratner (United States Supreme Court 268 U.S. 353, 1925)

Pre-code security device, pg 1016

In re Fabers, Inc (United States District Court, District of Connecticut, Bankruptcy Division, 19720

Consignments pg 1029).

In re Troupe (United States District Court, Western District of Oklahoma, Bankruptcy Division, 2006)

Classifying the collateral pg 1060).

Morgan County Feeders, Inc. v. McCormick (Colorado Court of Appeals, 1992)

The creation of a security interest pg 1068).

In re Grabowski (Bankruptcy Division, Southern District Of Illinois, 2002)