When I work with students on essay writing, as part of that program I provide students with my own answers to any essays I assign. I'm going to provide those answers here on the blog as well. The question that corresponds to this answer is found on page 39 @ https://www.floridabarexam.org/__85257bfe0055eb2c.nsf/52286ae9ad5d845185257c07005c3fe1/f9219c0da8c322cc8525824e00736741
July 2017: Florida Bar Exam:
First, it should be determined whether any security interest has attached since a security interest is enforceable only once it has attached. Attachment occurs when there is an authorized security agreement for value but only if the debtor also has rights in the collateral. The security agreement must be signed by the debtor and must reasonably identify the collateral. Attachment can also occur if the creditor takes possession or control of the collateral.
Here, we should begin with Uncle’s security interest. Debbie had rights in the antique car, and value was provided by Uncle. We are told that a promissory note was signed but there is nothing in the facts to indicate that a security agreement was signed between the parties. A question will be whether the promissory note is sufficient evidence to indicate that the parties agreed to enter into a security agreement. The words “as collateral” were used in the agreement between Debbie and Uncle which points in favor of treating this agreement as a valid security agreement.
A similar question involves First Bank. Debbie had rights in the collateral and value was provided by the bank. The facts do not tell us that a security agreement was signed, but unlike with Uncle, here we are told that a financing statement was entered into between Debbie and First Bank. That should suffice.
Thus, there are still some important questions to examine but it appears that a security interest has attached both as to the Debbie/Uncle agreement and as to the Debbie/First Bank agreement.
Next, it should be determined whether the potentially attached security interests have been perfected. To acquire priority over third parties, an attached security interest must be perfected. There are five methods to perfect a security interest: filing, taking possession of the collateral; control; automatic perfection; and temporary perfection. In addition, in Florida, a security interest in motor vehicles can be perfected only by notation on the vehicle’s certificate of title indicating that there is an existing security interest. As to filing, a security interest may be perfected by filing (either written or electronically) a financing statement indicating the collateral that is the subject of the security interest. There’s an exception for car dealerships which does not apply here.
Beginning with Uncle, we are told that, as required, the car’s title was mailed to the Department of Highway Safety and Motor Vehicles, and that Uncle received a new title listing him a lien holder. Next, as to her arrangement with First Bank, Debbie filed a financing statement naming herself as the debtor and listing the collateral as all cars and all merchandise listed as sale in the museum now owned or later acquired. First Bank did not note its security interest on the certificate of title for the cars it is using as collateral. In Florida, this will pose a problem for First Bank.
Thus, it seems likely that the security interest held by Uncle has been perfected, but the security interest held by First Bank is likely to have not been perfected.
The next issue is to determine the priority of the various security interests potentially held by Uncle and First Bank. In addition, it should be determined what rights the party with priority has upon default. A perfected security interest generally prevails over an unperfected security interest. When there are two unperfected interests, the first to attach has priority. When there are two perfected security interests, they will rank according to time of filing or perfection whichever is earlier. A buyer generally takes free of an unperfected security interest in the same collateral if the buyer gives value and receives delivery of the collateral without knowledge of a prior existing security interest. After default, a secured can sell, lease, license, etc., the collateral, provided that the debtor and other secured parties are given notice. If disposing of the collateral, it should be disposed in a commercially reasonable manner.
Here, as per the above analysis, it seems that Uncle has a perfected security interest, and First Bank does not. If that’s correct, then Uncle will have priority over First Bank. Priority would grant Uncle the right to dispose of the car used as collateral for Uncle’s loan since Debbie has defaulted. Uncle would also have priority over Buyer since Uncle’s security interest was perfected. First Bank does likely have a valid security interest in eight of the cars (all cars other than Uncle’s collateral and the car sold to Buyer.) Buyer would likely have priority over First Bank as to one of the cars since the facts provide nothing reliable to suggest that Buyer knew of First Bank’s unperfected security interested at the time that Buyer purchased the car for $25,000.
Thus, is it probable that as between Uncle and First Bank, Uncle has priority over the one car used as collateral for Uncle’s loan. First Bank has a security in the interest in 8 of the cars. Buyer has rights over First Bank in the car that Buyer purchased. Both Uncle and First Bank will likely be able to dispose of their collateral since Debbie has defaulted on all loans.
We should now move on to Carlos. Consignments are covered under Article 9 of the UCC if the consignor delivers goods to a merchant for the merchant to sell. The merchant must deal in goods of that kind, not operate under the name of the consignor, not be known by creditors to be substantially engaged in selling the goods of others, and not be an auctioneer. The goods must be valued at least $1,000 and must not be classified as consumer goods immediately prior to delivery to the merchant. A consignor is generally treated as a secured party holding a purchase-money security interest (“PMSI”) in inventory.
Here, Debbie is likely to be considered a merchant for purposes of the goods sold since she deals in antiques. She does not operate under Carlos’s name nor do the other limitations apply to her. The goods sold are likely inventory (goods held for sale) and presumably are valued at more than $1,000 since one sold for $5,000.
It seems, then, that UCC 9 should apply to the arrangement between Debbie and Carlos. And as for attachment, applying the elements as stated above for attachment, it appears that Carlos has an enforceable security interest in the antiques. That security interest would likely be deemed a secured PMSI in inventory as per the rules of consignment.
We should now determine, as between First Bank and Carlos, who has priority in the antiques. A PMSI in inventory prevails over other security interests in the same collateral provided that the PMSI is perfected by the time the debtor receives possession of the collateral and the PMSI holder sends notice to all conflicting holders of security interests in the same collateral.
Here, there are no facts to indicate that Carlos sent any notice to First Bank, and assuming Carlos did not, he will not be able to rely on the PMSI rules for priority. So, we must evaluate this under the more general rules. First Bank perfected its security interest in the antiques when it signed its financing statement and that happened before the consignment with Carlos. As per the above, when there are two perfected security interests, the first to perfect has priority.
Thus, it appears that although Carlos has a valid security interests in the antiques, First Bank will have priority over Carlos as to those antiques. First Bank should therefore have the right to dispose of those antiques upon Debbie’s default.
The next issue involves the money received by Debbie from the sale of the gas station pump. A perfected security interest in collateral will remain temporarily perfected as to any proceeds of that collateral for 20 days from the time that a security interest in the proceeds attach. Perfection will continue beyond 20 days if the financing statement covering the original collateral was filed, the proceeds may be perfected by filing in the same office in which the financing statement was filed, and the proceeds are not acquired with cash proceeds.
Here, as per the above, First Bank had priority over the antiques. The money received for the antique sold would be deemed proceeds of the antiques.
Thus, at the least temporary perfection will accrue to First Bank for the proceeds of the antiques. Some more facts would be helpful in determining whether that perfection will extend beyond 20 days or whether First Bank will need to take additional steps for extension. If First Bank is deemed to have priority over Carlos, Carlos may be forced to rely on contract law if he hopes to recover.
Next, there are a few Article 3 UCC issues to address. The first is whether the check given to First Bank for the sale of the gas pump is negotiable and whether it was negotiated. For a check to be negotiable it must be in writing and signed by the maker/drawer, contain an unconditional promise or order to pay a fixed amount of money. It must be payable to order or bearer, payable on demand or at a definite time, and must not state any additional undertaking or instruction. Negotiation is delivery by a person other than the maker or drawer to a person who then becomes a holder of the instrument. If the instrument is payable to order, then negotiation requires that the instrument is indorsed (generally signed by the person negotiating the instrument).
Here, Debbie sold the pump and accepted a check. It was signed and contained an order to pay $5,000 to the order of Debbie Debtor, Carlos Consignor. It was payable on demand and contained no additional undertaking or instruction. There was both a transfer and an endorsement since Car Buyer signed the check making it payable to Debbie and then gave the check to Debbie.
Thus, it appears the check is negotiable and that the check was negotiated from Car Buyer to Debbie.
Next is to determine if Debbie is a holder in due course of the check. To become a holder in due course, one must take the instrument as a holder, for value, in good faith without notice of wrongdoing on the part of the person transferring the instrument.
Here, Debbie, a holder of the check, provided value (the car). She likewise took the check in good faith. That would not be true if she knew that William had a claim against Car Buyer, but the facts provided us no reason to think that’s so.
It thus appears that Debbie is a holder in due course.
We should not determine whether First Bank has any liability for cashing the check. The issuer of a check (here, First Bank) must pay a check when the check is presented to the issuer. The issuer can, however, refuse to pay if a valid defense to payment exists. A customer of a check may order to stop payment of a check unless the check is a certified check. That isn’t to say that a bank cannot stop payment of a certified check; rather, a bank is not required to do so.
Here, after receiving William’s request, First Bank stopped payment by dishonoring the check. First Bank was in its right to do so, even if it was not required to do so.
Thus, even though Debbie will likely be deemed a holder in due course, First Bank should have no liability towards either Debbie or towards Car Buyer for dishonoring a check subject to a “stop payment” order.
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