Business Case: Security Interests

Barron was in the market to buy an airplane so that he could fly around the country with his family. He had a reasonable down payment and planned on financing the remaining majority of the plane's cost. He finally found a plane that suited his needs and went to his bank, International Credit, to obtain a loan. He signed a document titled "Loan Agreement" with the following provisions:

• "This agreement is entered into by Barron Van Zant, Borrower and Debtor, and International Credit, Bank and Secured Party, on April 15, 2019. The parties agree to the following:
• Borrower promises to pay Bank the principal amount of $200,000 (Two Hundred Thousand Dollars) plus interest at a rate of 4.25% APR in 60 monthly installments beginning on April 1, 2019;
• Bank shall secure payment and performance of these terms. Borrower hereby grants Bank a security interest in the Collateral described as follows: 1981 Piper Navajo Chieftan Airplane, Serial Number 12-456789 and US registration number 967-092481.
• Borrower agrees to make all repairs, replacements, and improvements to maintain any Collateral in good working condition.
• Signed:
• _/s/__Barron Van Zant _/s/_Linda Yang, Officer on behalf of International Credit"

Upon signing, the bank provided Barron with a cashier's check in the amount of $200,000. The bank also filed a financing statement with the Secretary of State in Ohio and with the Aircraft Registration Branch of the Federal Aviation Administration, where Barron lived but accidentally misspelled his last name as "Von Zant" and failed to list the serial number of the plane. Barron also registered the aircraft in his name with the Federal Aviation Administration.

After two years, Barron began to experience some financial difficulty and stopped making payments on his airplane. He sold his house in Ohio and purchased a smaller home in Montana, taking his plane with him. While in Montana, he took the plane to an aircraft mechanic to have routine maintenance performed. However, being unable to pay for the maintenance, the mechanic properly filed a mechanic's lien on the plane with the State of Montana and with the Federal Aviation Administration resulting in the airplane being stored in the hangar so that Barron would not have access to it. Montana law states, "Any mechanic's lien created may not take precedence over perfected security interests under the Uniform Commercial Code."

Concurrently, the bank was attempting to locate Barron to repossess the plane due to his default. They hired a private investigator who notified them of his location in Montana and likelihood of his storage of the plane at the nearby airport, where in fact the plane was being held by the mechanic unbeknownst to the bank. The bank then hired Rafael Russell to take possession of the plane on behalf of the bank.

Rafael knew that the security personnel would not let him enter the hangar and take possession of the plane, because he was technically not the owner. Therefore, he waited until no one was around and hopped a fence to reach the hangar. There were no other people around, so Rafael took a quick look at the plane to ensure it was flyable and then proceeded to start the engines. As he was taxying the plane onto the runway, he saw a man in a mechanic's suit running after him. He then heard, on his headphones, air traffic control order him to not take off. He took off anyway and flew the plane back to Ohio.

Note: Because aircraft sales, leases, and liens, have special federal filing requirements you should presume that the filing of the financing statement and lien statement to the FAA concurrent with the UCC filings satisfy any relevant federal filing requirements and that the UCC's provisions on attachment, perfection, and priorities will prevail.

1. Does the bank have a perfected security interest at the time of ordering Rafael to seize the plane?

Yes, because it was perfected by possession of the loan agreement.

Yes, because a financing statement was filed even though it contained a slight error.

No, because Van Zant's name was spelled incorrectly on the financing statement.

No, because the financing statement did not contain a sufficient description of the collateral.

2. May the mechanic recover anything from the bank, if the bank has a priority interest?

No, but his lien remains attached to the plane until it is paid.

No, he is not entitled to any proceeds, regardless of the type of disposition of the plane, as a lien creditor.

No, unless the bank sells the plane for more than the debt owed to them.

Yes, if he makes a written demand to the bank, they are required to pay him out first from the proceeds of any sale of the plane.

3. If the bank holds a perfected security interest with priority, did Rafael properly recover the plane under the Uniform Commercial Code (UCC)?

No, because Rafael's recovery did not constitute peaceful possession.

No, because the bank must first obtain a judicial order.

Yes, because a secured party can take possession of the collateral covered by the security agreement through self-help.

No, because the interest was not attached.

4. Assume that prior to Rafael taking possession of the plane, Barron files for Chapter 7 bankruptcy. Who has priority interest in the plane between the mechanic, the bank, and the bankruptcy trustee?

The mechanic because the bank did not have a perfected security interest in Montana, but the mechanic did and he had an interest before the bankruptcy trustee.

The bankruptcy trustee, because this position takes priority over all other secured and unsecured parties.

The bank because they perfected their interest before the bankruptcy trustee and they take priority over the mechanic's interest.

The mechanic because possession takes priority over the filing of a financing statement in a different state and the filing of a bankruptcy petition.

5. Assume that before Rafael takes possession of the plane, Barron has begun to use it in his new business offering air tours of Glacier National Park in Montana. Does his use of the plane for business purposes impact the bank's security interest in the plane?

Yes, because the plane is no longer a consumer good and therefore the security agreement in the form of the loan document is no longer valid.

No, nothing changes.

No, but the security interest is no longer attached.

No, but the security interest is no longer perfected.

Note: please answer the 5 question. Thank you