Business Case Problem with Sample AnswerPerfection of a Security Interest. G&K Farms, a North Dakota partnership, operated a farm in Texas. G&K was insured under the Supplemental Revenue Assistance Payments Program (SURE), through which the federal government provides financial assistance for crop losses caused by natural disasters. PHI Financial Services, Inc., loaned G&K $\$ 6.6$ million. PHI filed a financing statement that described the collateral as the debtor's interest in "Government Payments." The document did not refer to the farm's crops. G&K defaulted on the loan. Later, G&K received a SURE payment for crop losses and transferred some of the funds to its law firm, Johnston Law Office, P.C., in payment for services. PHI brought an action against Johnston to recover those funds as partial payment on its loan to G& K. Johnston argued that PHI did not have a perfected security interest in the SURE payment because the financing statement did not identify the crops. Was the description of the collateral in the financing statement sufficient? Why or why not?

73-75 Main Avenue, LLC, agreed to lease commercial property to PP Door Enterprise, Inc. if its principal officers executed personal guaranties and provided credit information. Nan Zhang signed the lease as manager of PP Door. The principals of PP Door signed the lease and guaranty agreements. When PP Door failed to make monthly payments, the lessor sued PP Door and its owner, Ping Ying Li. Li testified that she was the sole owner of PP Door but denied that Zhang was its manager. She also denied signing the guaranty agreement. She claimed that she had signed the credit authorization form because Zhang had told her he was too young to have good credit. Li claimed to have no knowledge of the lease agreement. She did admit, however, that she had paid the rent because Zhang had been in a car accident and had asked her to help pay his bills, including the rent.

$1.$ Li argued that she was not liable on the lease agreement because Zhang was not authorized to bind her to the lease. Do the facts support Li? Why or why not?

$2.$ Li claimed that the guaranty for rent was not enforceable against her. Why might the court agree?

73-75 Main Avenue, LLC, agreed to lease a portion of the commercial property at 73 Main Avenue, Norwalk, Connecticut, to PP Door Enterprise, Inc. Nan Zhang, as manager of PP Door, signed the lease agreement. The lessor required the principal officers of PP Door to execute personal guaranties. In addition, the principal officers agreed to provide the lessor with credit information. Apparently, both the lessor and the principals of PP Door signed the lease and guaranty agreements that were sent to PP Door’s once. When PP Door failed to make monthly payments, 73-75 Main Avenue filed a suit against PP Door and its owner, Ping Ying Li. At trial, Li testified that she was the sole owner of PP Door but denied that Zhang was its manager. She also denied signing the guaranty agreement. She claimed that she had signed the credit authorization form because Zhang had told her he was too young to have good credit. Li claimed to have no knowledge of the lease agreement. She did admit, however, that she had paid the rent. She claimed that Zhang had been in a car accident and had asked her to help pay his bills, including the rent at 73 Main Avenue. Li further testified that she did not see the name PP Door on the storefront of the leased location. [73-75 Main Avenue, LLC v. PP Door Enterprise Inc., 120 Conn.App. 150, 991 A.2d 650 (2010)]

Li claimed that the guaranty for rent was not enforceable against her. Why might the court agree?

LaSalle Bank loaned $8 million to Cypress Creek 1, LP, to build an apartment complex. The loan was secured by a mortgage. Cypress Creek hired contractors to provide concrete work, plumbing, carpentry, and other construction services. Cypress Creek later went bankrupt owing LaSalle$3 million. The contractors recorded mechanic’s liens when they were not paid for their work. The property was sold to LaSalle at a sheriff’s sale for $1.3 million. The contractors claimed that their mechanic’s liens should be satisfied out of the$1.3 million before any funds were distributed to LaSalle for its mortgage. The trial court distributed the $1.3 million primarily to LaSalle, with only a small fraction going to the contractors. Do the liens come before the mortgage in priority of payment? Discuss. [LaSalle Bank National Association v. Cypress Creek 1, LP, 242 Ill.2d 231, 950 N.E.2d 1109 (2011)]

Foreclosure on Mortgages and Liens. LaSalle Bank loaned $\$ 8$ million to Cypress Creek $1$, LP, to build an apartment complex. The loan was secured by a mortgage. Cypress Creek hired contractors to provide concrete work, plumbing, carpentry, and other construction services. Cypress Creek later went bankrupt owing LaSalle $\$ 3$ million. The contractors recorded mechanic's liens when they were not paid for their work. The property was sold to LaSalle at a sheriff's sale for $\$ 1.3$ million. The contractors claimed that their mechanic's liens should be satisfied out of the $\$ 1.3$ million before any funds were distributed to LaSalle for its mortgage. The trial court distributed the $\$ 1.3$ million primarily to LaSalle, with only a small fraction going to the contractors. Do the liens come before the mortgage in priority of payment? Discuss.

Disposition of Collateral. With a loan of $1.4$ million euros from Barclays Bank, PLC, Thomas Poynter bought a yacht. The loan agreement gave Barclays multiple stand-alone options on default. One option required the lender to give ten days' advance notice of a sale. A different option permitted the lender to avoid this requirement. When Poynter did not repay the loan, Barclays repossessed the yacht and notified Poynter that it would be sold-but did not specify a date, time, or place. Two months later, the yacht was sold. The sale price was less than Poynter owed, and Barclays filed a suit in a federal district court for the deficiency. Is Barclays entitled to collect even though it did not give Poynter ten days' advance notice of the sale? Explain.

Perfecting a Security Interest. Thomas Tille owned M.A.T.T. Equipment Co. To operate the business, Tille borrowed funds from Union Bank. For each loan, Union filed a financing statement that included Tille's signature and address, the bank's address, and a description of the collateral. The first loan covered all of Tille's equipment, including "any after-acquired property." The second loan covered a truck crane "whether owned now or acquired later." The third loan covered a "Bobcat mini-excavator." Did these financing statements perfect Union's security interests? Explain.

Disposition of Collateral. PRA Aviation, LLC, borrowed $\$ 3$ million from Center Capital Corp. to buy a Gates Learjet $55$B. Center perfected a security interest in the plane. Later, PRA defaulted on the loan, and Center obtained possession of the jet. The market, design, and mechanical condition of similar aircraft were reviewed to estimate the jet's value at $\$ 1.45$ million. The jet was marketed in trade publications, on the Internet, and by direct advertising to select customers for $\$ 1.595$ million. There were three offers. Center sold the jet to the highest bidder for $\$ 1.3$ million. Was the sale commercially reasonable? Explain.

Paul Barton owned a small property-management company, doing business as Brighton Homes. In October, Barton went on a spending spree. First, he bought a Bose surround-sound system for his home from KDM Electronics. The next day, he purchased a Wilderness Systems kayak and roof rack from Outdoor Outfitters, and the day after that he bought a new Toyota 4-Runner financed through Bridgeport Auto. Two weeks later, Barton purchased six new iMac computers for his office, also from KDM Electronics. Barton bought each of these items under an installment sales contract. Six months later, Barton's property-management business was failing. He could not make the payments due on any of these purchases and defaulted on the loans. Using the information presented in the chapter, answer the following questions.

Suppose that after KDM Electronics repossesses the surround-sound system, it decides to keep the system rather than sell it. Can KDM do this under Article $9$? Why or why not?

Paul Barton owned a small property-management company, doing business as Brighton Homes. In October, Barton went on a spending spree. First, he bought a Bose surround-sound system for his home from KDM Electronics. The next day, he purchased a Wilderness Systems kayak and roof rack from Outdoor Outfitters, and the day after that he bought a new Toyota 4-Runner financed through Bridgeport Auto. Two weeks later, Barton purchased six new iMac computers for his office, also from KDM Electronics. Barton bought each of these items under an installment sales contract. Six months later, Barton's property-management business was failing. He could not make the payments due on any of these purchases and defaulted on the loans. Using the information presented in the chapter, answer the following questions.

Which of these purchases would qualify as a PMSI in consumer goods?

The Scope of a Security Interest. Edward owned a retail sporting goods shop. A new ski resort was being constructed in his area, and to take advantage of the potential business, Edward decided to expand his operations. He borrowed a large sum from his bank, which took a security interest in his present inventory and any after-acquired inventory as collateral for the loan. The bank properly perfected the security interest by filing a financing statement. Edward's business was profitable, so he doubled his inventory. A year later, just a few months after the ski resort had opened, an avalanche destroyed the ski slope and lodge. Edward's business consequently took a turn for the worse, and he defaulted on his debt to the bank. The bank then sought possession of his entire inventory, even though the inventory was now twice as large as it had been when the loan was made. Edward claimed that the bank had rights to only half of his inventory. Was Edward correct? Explain.

Superior Wholesale Corporation planned to purchase Regal Furniture, Inc., and wished to determine Regal's net worth. Superior hired Lynette Shuebke, of the accounting firm Shuebke Delgado, to review an audit that had been prepared by Norman Chase, the accountant for Regal. Shuebke advised Superior that Chase had performed a highquality audit and that Regal's inventory on the audit dates was stated accurately on the general ledger. As a result of these representations, Superior went forward with its purchase of Regal. After the purchase, Superior discovered that the audit by Chase had been materially inaccurate and misleading, primarily because the inventory had been grossly overstated on the balance sheet. Later, a former Regal employee who had begun working for Superior exposed an e-mail exchange between Chase and former Regal chief executive officer Buddy Gantry. The exchange revealed that Chase had cooperated in overstating the inventory and understating Regal's tax liability. Using the information presented in the chapter, answer the following questions.

Suppose that a court determined that Chase had aided Regal in willfully understating its tax liability. What is the maximum penalty that could be imposed on Chase?

Vanessa Denai owned forty acres of land in rural Louisiana with a $1,600$-square-foot house on it and a metal barn near the house. Denai met Lance Finney, who had been seeking a small plot of rural property to rent. After several meetings, Denai invited Finney to live on a corner of her land in exchange for Finney's assistance in cutting wood and tending her property. Denai agreed to store Finney's sailboat in her barn. With Denai's consent, Finney constructed a concrete and oak foundation on Denai's property and purchased a $190$-square-foot dome from Dome Baja for $3,395$ dollars. The dome was shipped by Doty Express, a transportation company licensed to serve the public. When it arrived, Finney installed the dome frame and fabric exterior so that the dome was detachable from the foundation. A year after Finney installed the dome, Denai wrote Finney a note stating, "I've decided to give you four acres of land surrounding your dome as drawn on this map." This gift violated no local land-use restrictions. Using the information presented in the chapter, answer the following questions.

Is the dome real property or personal property? Explain.

Professor Wise is teaching a summer seminar in business torts at State University. Several times during the course, he makes copies of relevant sections from business law texts and distributes them to his students. Wise does not realize that the daughter of one of the textbook authors is a member of his seminar. She tells her father about Wise’s copying activities, which have taken place without her father’s or his publisher’s permission. Her father sues Wise for copyright infringement. Wise claims protection under the fair use doctrine. Who will prevail? Explain. (See Copyrights.)