Commercial Law Questions And
Answers
Honest John sold Nancy Debts a used car for $900, to be paid off in three payment of
$300 each. The K was oral. Nancy missed the second payment, and one of Honest
John's employees repossessed the car and returned it to the seller. Nancy sued Honest
John for conversion. Who should win? - Correct Answer - · Unpaid seller can only
repossess in 3 circumstances
o (1) when §2-702 applies. If J can can show N was already insolcvent at the tiem she
made the purchase (10 day limit and exception if N gave J written statement she was
solcent)
o (2) if the buyer granted seller a security interest in the car
o (3) Could recover if/when seller sues and gets a judgement (judicial lien)
· This is just a conditional sales K. Leads to the B v. R problem.
· Effect of retention of title under the UCC à § 2-401(1)
o Any retention or reservation by the seller of the title in goods shipped or delivered to
the buyer is limited in effect to a reservation of a security interest.
Assume that a state statute gives someone doing repairs a possessory artisan's lien on
the property repaired. Mr. Baker took his car into Mack's Garage for repair but, being
strapped for funds, couldn't pay the full bill, and Mack wouldn't let him have the car
back. Is Mack's artisan's lien an Art. 9 security interest?
What if, prior to the repair work, Mr. Baker signed a statement giving Mack's Garage the
right to repossess the car if the bill wasn't paid. Does this agreement create a security
interest under the Code? - Correct Answer - · No. §9-109(d)(2) provides that Art. 9 does
not apply to a lien, other than agricultural lien, given by statute or other rule of law for
services or materials.
· Yes! §9-109(a)(1) provides that a transaction, regardless of its form, that creates a
security interest in personal property or fixtures by K are subject to Art. 9.
To raise money, Farmer Brown Food Stand sold all of its AR to NFC, which notified the
customers that henceforth all payment should be made directly to NFC. Is this sale
nonetheless an Article 9 security interests? - Correct Answer - · This is not a loan, but
an outright sale. Thus, NFC keeps all proceeds §9-608(b). So, if Farmer B defaults NFC
does not have to return any proceeds to debtor (Farmer B)
o NOTE: if it were a loan, the excess proceeds goes back to debtor
· This sale is an Art. 9 SI under §9-102(c) - "this article applies to (3) sale of accounts . .
..
· §9-102(a)(28) - Debtor - a debtor means (B) seller of accounts . . . . à Famer B is the
debtor, NFC is the creditor
, · This transaction is included in the Art. 9 to avoid problems of distinguishing between
transactions in which a receivable secured an obligation and those in which a receivable
is sold outright. It avoids the secret lien problem of B v. R.
· NFC must perfect under Art. 9 so they don't lose priority to other creditors.
· Takeaway - outright sale of accounts = covered by Art. 9
· Exception! §9-109(d)(4) (5) and (7)
o (4) if assignment of accounts as part of a slae of the business out of which they arose
(EX: selling entire business to another entity and assigning all AR's to the buyer)
o (5) assignment of accounts which for is for the purpose of collection only (EX: assign
accounts for someone to collect)
o (7) assignment of a single account ot an assignee in full or partial satisfaction of a
preexisting indebtedness (EX: paying off a debt with a single AR).
The loan agreement between Dickens Publishing, Inc. and ONB contained a negative
pledge clause. Dickens agreed not to use any of its property as collateral for debt to
other creditors. Is the transaction governed by Art. 9? Suppose Dickens had agreed as
follows: "Dickens agrees to repay Lender the entire principal of $18k on or before April
1, 2015. If Dickens cannot refinance its current debt to cover this amount or if another
source of funds is unavailable, Dickens agrees to sell its inventory and equipment in
order to repay Lender." Is the transaction governed by Art. 9? - Correct Answer - · No,
not SI is created. There is no encumbrance of property, just a promise to not use that
property as collateral to other creditors. Does not fall within scope of Art. 9.
· Takeaway: Negative pledge is not the granting of a SI in any particular property. No
right on default to take possession and sell.
· Second Part - To be a SI, ONB must have the right to seize the property and sell it.
This is essentially just a promise, not a SI. It is an unsecured debt.
Antiques R Us was the largest antiques store in the city, well known as a place where
antique dealers could hire out space and exhibit their wares, with the store handling the
sales and taking a commission on each one and returning to the dealers items that
remained unsold. When the store takes out a loan from ONB and uses as collateral "all
its property," will the bank's SI reach the items in the store that belongs to the dealers if
the dealers have never taken the steps required of consignors under Art. 9? - Correct
Answer - · Likely not. This is the "not generally known by its creditors to be substantially
engaged in the business of selling the goods of others" test. Here, the facts indicate that
ARS is well known to do this, thus it is a "consignment" under §9-102(a)(20) and
therefore not subject to Art. 9 under §9-109(a)(4).
· If creditors are aware that they sell the goods of others, they have notice that the
"consignee" does not own his inventory, but rather the consignors do.
When Luke Skywalker, an artisan who handcrafted his wares, finished crated a large,
jeweled sword, he took it down to Weapons of the World (WOW), a large gun and
weapon dealer which mostly sold items that it either manufactured itself or bought from
other dealers. The sword was appraised as being worth over $25k. Luke asked WOW to
sell the sward for him. Is this an Art. 9 assignment so that Luke needs to take Art. 9
steps to protect himself form WOW's other creditors who have an interest in the store's
Answers
Honest John sold Nancy Debts a used car for $900, to be paid off in three payment of
$300 each. The K was oral. Nancy missed the second payment, and one of Honest
John's employees repossessed the car and returned it to the seller. Nancy sued Honest
John for conversion. Who should win? - Correct Answer - · Unpaid seller can only
repossess in 3 circumstances
o (1) when §2-702 applies. If J can can show N was already insolcvent at the tiem she
made the purchase (10 day limit and exception if N gave J written statement she was
solcent)
o (2) if the buyer granted seller a security interest in the car
o (3) Could recover if/when seller sues and gets a judgement (judicial lien)
· This is just a conditional sales K. Leads to the B v. R problem.
· Effect of retention of title under the UCC à § 2-401(1)
o Any retention or reservation by the seller of the title in goods shipped or delivered to
the buyer is limited in effect to a reservation of a security interest.
Assume that a state statute gives someone doing repairs a possessory artisan's lien on
the property repaired. Mr. Baker took his car into Mack's Garage for repair but, being
strapped for funds, couldn't pay the full bill, and Mack wouldn't let him have the car
back. Is Mack's artisan's lien an Art. 9 security interest?
What if, prior to the repair work, Mr. Baker signed a statement giving Mack's Garage the
right to repossess the car if the bill wasn't paid. Does this agreement create a security
interest under the Code? - Correct Answer - · No. §9-109(d)(2) provides that Art. 9 does
not apply to a lien, other than agricultural lien, given by statute or other rule of law for
services or materials.
· Yes! §9-109(a)(1) provides that a transaction, regardless of its form, that creates a
security interest in personal property or fixtures by K are subject to Art. 9.
To raise money, Farmer Brown Food Stand sold all of its AR to NFC, which notified the
customers that henceforth all payment should be made directly to NFC. Is this sale
nonetheless an Article 9 security interests? - Correct Answer - · This is not a loan, but
an outright sale. Thus, NFC keeps all proceeds §9-608(b). So, if Farmer B defaults NFC
does not have to return any proceeds to debtor (Farmer B)
o NOTE: if it were a loan, the excess proceeds goes back to debtor
· This sale is an Art. 9 SI under §9-102(c) - "this article applies to (3) sale of accounts . .
..
· §9-102(a)(28) - Debtor - a debtor means (B) seller of accounts . . . . à Famer B is the
debtor, NFC is the creditor
, · This transaction is included in the Art. 9 to avoid problems of distinguishing between
transactions in which a receivable secured an obligation and those in which a receivable
is sold outright. It avoids the secret lien problem of B v. R.
· NFC must perfect under Art. 9 so they don't lose priority to other creditors.
· Takeaway - outright sale of accounts = covered by Art. 9
· Exception! §9-109(d)(4) (5) and (7)
o (4) if assignment of accounts as part of a slae of the business out of which they arose
(EX: selling entire business to another entity and assigning all AR's to the buyer)
o (5) assignment of accounts which for is for the purpose of collection only (EX: assign
accounts for someone to collect)
o (7) assignment of a single account ot an assignee in full or partial satisfaction of a
preexisting indebtedness (EX: paying off a debt with a single AR).
The loan agreement between Dickens Publishing, Inc. and ONB contained a negative
pledge clause. Dickens agreed not to use any of its property as collateral for debt to
other creditors. Is the transaction governed by Art. 9? Suppose Dickens had agreed as
follows: "Dickens agrees to repay Lender the entire principal of $18k on or before April
1, 2015. If Dickens cannot refinance its current debt to cover this amount or if another
source of funds is unavailable, Dickens agrees to sell its inventory and equipment in
order to repay Lender." Is the transaction governed by Art. 9? - Correct Answer - · No,
not SI is created. There is no encumbrance of property, just a promise to not use that
property as collateral to other creditors. Does not fall within scope of Art. 9.
· Takeaway: Negative pledge is not the granting of a SI in any particular property. No
right on default to take possession and sell.
· Second Part - To be a SI, ONB must have the right to seize the property and sell it.
This is essentially just a promise, not a SI. It is an unsecured debt.
Antiques R Us was the largest antiques store in the city, well known as a place where
antique dealers could hire out space and exhibit their wares, with the store handling the
sales and taking a commission on each one and returning to the dealers items that
remained unsold. When the store takes out a loan from ONB and uses as collateral "all
its property," will the bank's SI reach the items in the store that belongs to the dealers if
the dealers have never taken the steps required of consignors under Art. 9? - Correct
Answer - · Likely not. This is the "not generally known by its creditors to be substantially
engaged in the business of selling the goods of others" test. Here, the facts indicate that
ARS is well known to do this, thus it is a "consignment" under §9-102(a)(20) and
therefore not subject to Art. 9 under §9-109(a)(4).
· If creditors are aware that they sell the goods of others, they have notice that the
"consignee" does not own his inventory, but rather the consignors do.
When Luke Skywalker, an artisan who handcrafted his wares, finished crated a large,
jeweled sword, he took it down to Weapons of the World (WOW), a large gun and
weapon dealer which mostly sold items that it either manufactured itself or bought from
other dealers. The sword was appraised as being worth over $25k. Luke asked WOW to
sell the sward for him. Is this an Art. 9 assignment so that Luke needs to take Art. 9
steps to protect himself form WOW's other creditors who have an interest in the store's
