All dates specified below are in the same year.
Carlos Morales, resident of South Lake Tahoe, California, owned a valuable collection of rare books. He has loaned the books indefinitely to the Rose Garden Public Library ("Library"), located in North Lake Tahoe, Nevada. The Library permits patrons to read the rare book collection on the premises but does not permit patrons to borrow them.Carlos approached ABC Finance ("Finance") for a $40,000 loan, to be used in part to help finance his sister's education and in part to retain a lawyer as counsel to a non-profit association Carlos wanted to form to help preserve Lake Tahoe from the adverse consequences of development. Carlos offered the books as collateral. Finance was willing to make the loan, secured by the books (which would remain on loan to the Library). Assume that a security interest in favor of Finance does not violate the F.T.C. Credit Practices Rule (recall Part B of Problem.FTC Rule).
On February 15, the following events occurred: Finance advanced Carlos the funds and Carlos signed a note and security agreement in favor of Finance. The security agreement described the collateral as "the following rare books: [stating the title and author of each book]." The Library wrote down for itself and kept in the appropriate file a note that it was holding the rare books on behalf Finance. Finance did not file a financing statement.
On September 15, the Library temporarily returned the books to Carlos because of remodeling of the Library. On the same day, the Library notified Finance that it had returned the books to Carlos. On September 20, Finance filed a financing statement, containing the information required by U.C.C. 9-502(a), with the office named in Nevada Commercial Code 9-501(a)(2).
On September 25, Carlos sold 1/2 of the rare books to a bookstore for $5,000. The bookstore is located in California. The bookstore did not know about the security interest when it took delivery of the books.
On September 30, Finance filed a financing statement, containing the information required by U.C.C. 9-502(a), with the California Secretary of State. The filing office accepted the financing statement for filing even though it failed to contain the debtor's mailing address.
On November 5, Carlos delivered the remaining rare books to his next door neighbor in settlement of the neighbor's claim that a leak from a broken water line on Carlos' property had damaged the neighbor's property. The neighbor resides in California. The neighbor did not know about the security interest when he took delivery of the books.
Carlos defaulted on payments to Finance and Finance learned about the delivery of the books to the bookstore and to the neighbor. Finance has written to the bookstore and the neighbor demanding that they surrender the books to Finance. You represent both the bookstore and the neighbor. What will you advise each about the merits of the demand by Finance. In addition to whatever other sections you may deem appropriate, consult U.C.C. 9-520, 9-201(a), 9-315, 9-317, and 9-320.