Question

1. Smith, is a farm equipment dealer in St. Louis County, Minnesota. On August 16, 2017, Smith sold a combine (used to harvest wheat and other grains) to Edwards, a resident of Douglas County, Wisconsin, for $5,000 cash down and $95,000 payable in 120 monthly installments of $1,000 each (including interest), commencing September 1, 2017. To secure payment of the outstanding debt, Edwards signed a security agreement granting Smith a security interest in the combine.

Assume that Smith took whatever steps were necessary to perfect his security interest in the combine no later than September 1, 2017, suppose that, on July 24, 2018, still owing Smith $84,000 (in other words, Edwards was current on her payments), Edwards traded the combine to Jones Farm Equipment, Inc. (another farm equipment dealer), Saint Louis County, Minnesota for a $75,000 tractor to use on Edwards’s “weekend farm” in Saint Louis County.

1. Does Smith still have a perfected Security Interest in the combine as of August 1, 2018?

Answer 1

Solution

The law of secured transactions governs the enforcement of security interest in Unites States under Uniform Commercial Code (UCC) Article 9. The security interest exists when a borrower enters into a contract with lender, which allows the lender to take collateral the borrower owns in case if the borrower is not in position to repay the borrowed money or defaults the payment. Since the security interest provides protection to the lender to get his payment back, the security interest is considered as economic security.

The agreement signed by the lender and borrower includes a description of the borrower's collateral it secures. The collateral singed in the agreement is the rights of the lender, if the borrower defaults. The UCC Article 9 requires the security agreement in writing. Such document in writing must be authenticated by the parties. In the absence of agreement or authentication, the security interest cannot be enforced by law.

The perfection of a security agreement allows the lender to gain the priority to the collateral over any third party.

In the given case study, the following points are the rights of Smith (the lender) over the Edward (borrower) as per UCC Article 9:-

• The written agreement between Smith and Edward allows Smith to have the rights on combine till the end of the agreed payment term. Therefore, Smith will have the rights to take collateral over the combine till the last installment paid by Edwards (120 installments). Till the agreement period is over, the combine will be at the possession of Edward but the controlling (ownership) rights over the combine still stays with Smith.
• The combine which serves a collateral in the agreement between Smith and Edward cannot be sold or transferred to any other third party when such agreement exits. In case of a transfer, the perfection of a security agreement allows Smith to claim the proceeding from such transfer as Smith has the priority to the collateral (combine) over any third party.

Conclusion

• As per UCC article 9,Smith has the perfected security interest in the combine as of August 1, 2018 even though Edward is paying her dues correctly.
• As per the Law, Smith has the rights to claim $ 75000 received as proceedings by Edward towards the sale of combine to another third party.
• As per the Law, Edward's priority will be to settle the obligations of Smith before taking control of the combine.