Problem.SP vs. buyer.1

     Colonel Electric, a retired military officer, has decided to own and operate an appliance dealership in California, retailing such "big ticket" items as washers, dryers, stoves, refrigerators, and dishwashers. He soon learns that he must finance his inventory because manufacturers of such items will sell only for cash. He approaches a bank which, convinced of his creditworthiness and his business plan, agrees to "floor plan" his inventory. Pursuant to this floor planning arrangement, bank will periodically advance funds to manufacturers for an inventory of appliances to be shipped to Colonel Electric, and bank will retain a security interest in the inventory to secure repayment by Colonel Electric. In addition, the arrangement calls for Colonel Electric to assign to the bank retail installment contracts signed by customers who purchase appliances from Colonel Electric on credit if the credit has been approved in advance by the bank. Under these retail installment contracts, consumers promise to pay for the appliance(s) purchased over time and grant the seller a security interest in the appliance(s) purchased to secure payment.

     A. How does the bank perfect its security interest in the inventory?

     B. When the inventory is sold to individual consumers, does the bank's existing security interest continue in the collateral sold?

     C. If an individual consumer purchases an appliance from Colonel Electric under a retail installment contract that grants a security interest in the appliance to Colonel Electric, what, if anything, may the bank do if the consumer defaults under the retail installment contract after Colonel Electric has assigned the contract to the bank?

     D. Suppose, prior to his or her default, the consumer had sold the appliance at a garage sale? Do the bank's rights against the consumer change? Can the bank find the appliance or the garage sale purchaser? Does the bank have any rights to the appliance? Against the garage sale purchaser?  U.C.C. 9-320(b) addresses these last two questions?  U.C.C. 9-320(b) properly assumes automatic perfection of a purchase money security interest in consumer goods. Is it likely that a secured party like Colonel Electric, which makes many sales on secured credit and probably takes advantage of automatic perfection, will file a financing statement in connection with all of its secured sales to give it the protection of U.C.C. 9-320(b)? If, for some reason, the secured party does file a financing statement, is the purchaser at the garage sale likely to tell the seller that he or she will return to buy the refrigerator after checking with the Secretary of State for financing statements? If your answers to the preceding two questions are "no", does U.C.C. 9-320(b) make any sense?  What might make more sense?

     E. Suppose that the consumer referred to in (D), above, couldn't sell the appliance at a garage sale but could and did sell it to a used appliance dealer? Does U.C.C. 9-315(a)(1), 9-320(a), or 9-320(b) protect the used appliance dealer?  Remember to consult U.C.C. 1-201(9).