Secured Transactions

Fact pattern

Debtor (D) is in the private transportation business, using its fleet of unmarked luxury automobiles and boats to transport its clients. Starting in 2007, D’s profits declined, so D decided to borrow money to remain solvent. D maintained all its financial accounts, including its savings account, at Bank (B). D thus requested a loan from B, and B agreed.

Accordingly, in January 2010, D and B executed a loan agreement providing for a $3 million loan from B to D. The loan agreement included the following security-interest clause: “D grants B a security interest in all of D’s automobiles, boats, accounts, and deposit accounts held at B, now owned and hereafter acquired.”

D is in State X. Pursuant to State X’s law on perfecting a security interest in automobiles and boats, B had its security interest properly notated on the certificate of title for each vehicle in D’s current fleet. This notation will encumber each certificate of title until the $3 million loan is paid in full. B also filed a properly completed financing statement with the office of the Secretary of State X (the central statewide filing office designated by statute). The financing statement described the collateral as “B’s automobiles, boats, and accounts.”

By 2014, D’s business was almost back to its pre-2007 profit margin. Wanting to grow and take advantage of low interest rates, D decided to borrow money from FC, a financing company. In February 2014, D borrowed $2 million from FC. The corresponding security agreement stated that D granted FC a security interest in all of D’s automobiles and boats, as well as D’s savings account with B. FC then filed a financing statement with the office of the Secretary of State X. The financing statement properly identified D as the debtor and described the collateral as “all of the debtor’s assets.” With the loan proceeds from FC, D purchased several new automobiles and boats.

Unfortunately, D’s business later started to decline again. By February 2017, D was in default on its loan with B. Since the $3 million loan in January 2010, B has not monitored D’s assets, nor taken any additional steps regarding its security interest. After D refused to surrender collateral to bring the outstanding balance current, B decided to pull directly from D’s savings account and apply that money toward the outstanding balance.

D also defaulted on its loan from FC. FC worried that it would not recover the outstanding balance on its loan, so it decided to hire a repossession company to seize, or at least render inoperable, some of D’s assets. At approximately 10:00 in the morning, the repossession company found two of D’s boats stored in a private marina. This marina was accessible by a public road, with just a locked gate between the parking lot and the dock. Without anyone noticing, the company’s employees quickly cut the lock on the gate, gained access to the boats, and rendered them inoperable.

Questions

1. As of February 2017, does B have a perfected security interest in any of D’s assets, and if so, which? Explain.
2. As of February 2017, does FC have a perfected security interest in any of D’s assets, and if so, which? Explain.
3. Were B’s and FC’s respective post-default actions lawful? Explain.