Question

In hopes of improving his social life Peter purchased a new MX-5 Miata from Midlife Mazda for $35,000, putting $5,000 down and financing the balance with a loan from Shark Lending, for which he made a negotiable promissory note payable to Shark. The note is payable in equal monthly installments, together with interest at 12% per year, for a term of seven years. Peter’s agreement with Shark provided that in the event Peter defaults on the loan Shark is permitted to repossess the Miata. Shark did all it could under applicable state law relating to promissory notes and secured transactions to help assure that it would ultimately be fully paid on the loan, even though it knew that the Miata Peter purchased partly secured an inventory loan Midlife had with B Bank. Peter took title to the car, and happily drove off to try and find a date. In these circumstances the loan note, and related security transactions are primarily covered under

a. mortgage lending law            c. UCC Article 3         

b. federal Bankruptcy law         d. UCC Article 9          e. c and d, together, are correct

I had previously thought that the question is E, since a negotiable instrument is involved, qualifying for UCC Article 3. In addition, since the car is used for collateral on the loan, it qualifies for UCC Article 9 as well.

Answer 1

UCC Article 9. (which is Option D)

____

Explanation:

UCC Article 9 covers secured transactions whereby the lendor is the secured party. In the given case, the transaction between Peter and Shark is secured by the agreement which allows Shark to reposses the car if Peter defaults in meeting his obligations as and when they become due.

Further, the provided case justifies the essential requirements (attachment and perfection) of UCC Article 9.

The transaction between Peter and Shark is governed by a secured agreement which entitles Shark to reposses the collateral (car) if Peter fails to make the payment (s) as agreed upon. The transaction has a value (the amount of loan in exchange for car as collateral) and the Peter has the right over the property (car) that is given as collateral. This justifies the three requirements of attachment.

In the given case, it has been clearly provided that Shark did everything to protect its own interest. Shark will be fully paid on the loan in the event of any default by Peter and this establishes its priority over other creditors in the settlement of claims. Therefore, the criteria of perfection is also satisfied.