1-The way a creditor such as a bank or supplier obtains security for the credit they extend is by taking collateral in the debtor’s personal property. In order for a security interest to be legally enforceable it needs to be attached to the goods of the debtor. The UCC [9-203] lists the three basic requirements for attaching the security interest to the goods of the debtor. The first is an agreement where the debtor grants the creditor a security interest in the specific property the debtor has an interest in. Included in the agreement are the terms of default, a reasonable description of the collateral and any provisions the creditor wants to impose on the debtor. In addition the debtor must have rights on the collateral and the creditor must give the debtor value.
2-Creditors would seek to perfect their attachments in order to obtain maximum protection against other creditors. Perfection is the way a creditor attaches his security interest to collateral and obtains protection against other creditors or purchasers of the collateral from the debtor. The bank would write a financing statement against any personal property such as equipment or inventory that Elaine’s business acquired or will acquire in the future. The financing statement must include the names of both the debtor and secured party as well as a description of collateral covered. The bank would then file it with the appropriate public office. While any property acquired in the future would be attached automatically the bank would need to write a new financing statement to perfect the new security interest and protect it against other creditors. The local supplier of display fixtures would create a purchase money security interest in collateral other than inventory. The UCC [9-324] states that the supplier would have to perfect the goods upon or within 20 days of delivery. The inventory suppliers would create a purchase money security interest in inventory. The suppliers would have to perfect the security interest at the time the debtor receives possession of inventory. The supplier has to notify the in writing any prior secured creditors before the debtor receives the inventory. The holder of the competing security interest must receive the notice within five years before the debtor receives the inventory. The notification needs to describe the inventory and state that the supplier wants to receive a purchase money security interest in inventory of the debtor.
3-In the event that Elaine defaults the relative rights of each creditor will depend on when the attachment was created and at what level the perfection were performed. For example if all of the creditors obtained maximum protection the UCC [article 9 part 3 subpart 3] gives priority to purchase money security interest. Included would be the inventory suppliers on the inventory each one supplied and the supplier of the display fixtures for the displays they supplied. The bank would come last as far as inventory and display fixtures even though they filed proper financing statements but they would have first right to anything other than goods supplied by the other suppliers. In a case where some creditors perfected and some only attached those who perfected have first rights. Where none of the creditors perfected the courts would look at the dates of attachment and whoever attached first would collect first.
4-Elaine would automatically be protected by perfection if she completes all the requirements of attachment. A creditor who sells goods to a consumer on credit can obtain limited perfection of a security interest merely by attaching the security interest to the goods.
5-Taking a utilitarian approach the question would be what is the course of action that produces the greatest benefit over harm for everyone affected. Layaway agreements would be unethical because the seller is encouraging buyers to make a bad financial choice. Most people who buy on layaway don’t have a strong financial background and don’t realize they should only buy what they can afford. It would be ethical of Elaine to retain their money if they can’t complete the sale because it will help deter them from making future layaway transactions.