INSTRUCTIONS:
This is a group assignment. We will select team members and you may commence working the Group Project.
You are required to read the case below and answer the questions that follow. In answering the question, refer and cite UCC article 9.
UCC Article 9 should be your primary source and you may consider using your text book as a secondary source.
INTRODUCTION
The Uniform Commercial Code (UCC) was enacted to facilitate consistent business laws among the states. It is divided into sections, referred to as Articles, based on the particular area of law. For example, Article 2 governs transactions involving the sale of goods, negotiable instruments law is found in Article 3, and bank deposits and collections is addressed in Article 4.
The subject of this case study is governed by Article 9, Secured Transactions. Specifically, these are cases wherein personal property is used as collateral and a Security Interest is created.
AT1
PREMISE
Mary is the sole owner of Hi-Value Shoe Store, a small business located in a suburban working class community. She inherited the business from her Aunt Marty three years ago. Up until then, business had been slow because of the declining economy. Lately, however, business has picked up, and revenues have doubled because of an increase in employees at the neighboring manufacturing plant. The plant recently received a valuable contract from the federal government to produce bulletproof vests.
As a result of the increase in business, Mary hired two new full-time employees but was short on the funds necessary for expansion of the business. Mary was able to obtain a loan from Community Bank, but the bank required a security interest and that Mary be personally liable on the note. The language of the security agreement contained the following clause: “The note is secured by the inventory of Hi-Value Shoe Store, currently owned and any later acquired inventory, until said note is fully paid and satisfied.” The bank immediately perfected the security interest by filing a financing statement.
Mary decided to purchase inventory from ABC Wholesale Suppliers (ABC) on credit a few weeks after obtaining the loan from the bank. She took possession of the inventory on April 16. ABC required that she sign a promissory note and security agreement, with the inventory being listed as collateral.
For at least one year, Mary was able to make payments on both obligations from the proceeds of the business. Unfortunately, the manufacturing plant lost its government contract and eliminated 50% of its workforce over a six-month period.
As a result, Mary’s business lost customers and began to operate at a loss. It became unable to pay its obligations to both the bank and ABC and ended up defaulting on both loans.
Both secured parties sought to repossess the inventory from Mary’s store, sell the inventory, and then hold Mary personally liable for any deficiency. Mary, aware that she might be held personally responsible for the debt, considered declaring bankruptcy.
1. Assume that Mary defaulted on her obligation to ABC but made one late payment to the bank in December. Would this payment have any effect on the priority of the secured creditors? Why or why not?
2. Assume Mary did not file Bankruptcy. Mary just closed the store and walked away. The secured creditors had an auction of the remaining inventory and fixtures. Also, assume Community Bank forgot to perfect its interest by not filing The UCC 1 Form with the NC Secretary of State. Who has priority in the proceeds of the sale of the inventory? Who has priority in the proceeds of the sale of the fixtures?
3. Discuss preferential and fraudulent transfers in general . This question has no relationship to the above scenario.
