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Secured Transactions

Exam 9
30 minutes

Fact Pattern

Two years ago, a retailer of home electronic equipment borrowed $5 million from a finance company. The loan agreement, signed by both parties, provided that the retailer granted the finance company a security interest in all of the retailer’s present and future inventory to secure the retailer’s obligation to repay the loan. On the same day that it made the loan, the finance company filed in the appropriate state filing office a properly completed financing statement reflecting this transaction.

Six months ago, a buyer purchased a home entertainment system from the retailer for a total price of $7,000. The buyer paid $1,000 as a down payment on the system and agreed to make 12 additional monthly payments of $500 each. The buyer signed a “credit purchase agreement” memorializing the financial arrangement with the retailer and providing that the retailer would “retain title” to the entertainment system until the buyer’s obligation to the retailer was paid in full. The buyer then returned home with her new home entertainment system. The buyer had no knowledge of the retailer’s agreement with the finance company and acted in good faith in acquiring the home entertainment system. The retailer did not file a financing statement with respect to this transaction.

Two months ago, the buyer decided that she could no longer afford her monthly $500 payments for the home entertainment system. She contacted her friend, who had often expressed interest in acquiring a home entertainment system. After a brief discussion, the friend agreed to buy the home entertainment system from the buyer for $4,000 if the friend could pay the price 90 days later, when he anticipated receiving a bonus at work. The buyer accepted the friend’s proposal, and the friend gave the buyer a check for $4,000. The buyer promised to hold the $4,000 check for 90 days before depositing it. The friend took the entertainment system and began using it at his own home. The friend had no knowledge of the buyer’s agreement with the retailer or of the retailer’s agreement with the finance company.

The retailer is in financial distress and has missed a payment owed to the finance company. Meanwhile, since the friend bought the home entertainment system from the buyer, the buyer has not made any of her monthly payments to the retailer.


Questions

  1. 1. Does the finance company have an interest in the home entertainment system? Explain.

    2. Does the retailer have an interest in the home entertainment system? Explain.

    3. Does the retailer have an interest in the $4,000 check? Explain.

Question 1

1. Does the finance company have an interest in the home entertainment system? Explain.

2. Does the retailer have an interest in the home entertainment system? Explain.

3. Does the retailer have an interest in the $4,000 check? Explain.

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