Secured Transactions
Exam 3
Fact pattern
A transportation company owned a fleet of luxury automobiles and boats. Following some bad press, the company’s profits declined. To remain solvent, the company approached the bank that maintained all the company’s financial accounts, including its only savings account, and requested a loan.
The bank agreed to loan the company $3 million. The loan agreement granted the bank a security interest in “all automobiles, boats, accounts, and deposit accounts that the company now owns and hereafter acquires.”
The relevant state law stated that a security interest in an automobile or boat was perfected by listing the interest on the vehicle’s title. Shortly after the loan agreement was signed, the bank had its security interest properly notated on the certificate of title for each vehicle in the company’s current fleet. The bank also filed a properly completed financing statement with the correct state office. This statement described the collateral as the company’s “automobiles, boats, and accounts.”
Four years later, the company’s business was almost fully recovered. Wanting to grow, the company borrowed $2 million from an investment firm. The corresponding security agreement granted the firm a security interest in all the company’s automobiles and boats and its savings account with the bank. The firm filed a financing statement with the correct state office. This statement identified the company as the debtor and described the collateral as “all the debtor’s assets.” The company used the loan proceeds to buy additional automobiles and boats.
The company’s business later declined again. Seven years after the loan from the bank and three years after the loan from the investment firm, the company defaulted on both loans. Other than the bank’s initial efforts to notate its lien on the vehicle titles and to file the financing statement, the bank had not taken any additional steps regarding its security interest. Similarly, other than filing the initial financing statement, the investment firm had not taken any additional steps regarding its security interests.
After the company refused to surrender collateral, the bank pulled money directly from the company’s savings account and applied that money toward the outstanding balance on the bank’s loan.
The investment firm hired a repossession company to help it collect some of the company’s assets. Around 10:00 in the morning, the repossession company found two of the company’s boats stored in a private marina. The marina was accessible by a public road, with just a locked gate between the parking lot and the dock. Although people were around, no one noticed when the repossession agents cut the lock, accessed the boats, and rendered them inoperable.
Questions
At the time of the company’s default, did the bank have a perfected security interest in any of the company’s assets? If so, which ones? Explain.
At the time of the company’s default, did the investment firm have a perfected security interest in any of the company’s assets? If so, which ones? Explain.
Were either the bank’s or the investment firm’s respective postdefault actions lawful? Explain.