Agile Corporation borrows $1 million from Hi Finance Company (HFC). Agile signs
ID: 1173215 • Letter: A
Question
Agile Corporation borrows $1 million from Hi Finance Company (HFC). Agile signs a financing statement that describes the collateral, its inventory and proceeds, and HFC files the statement in the appropriate state office. Using the same collateral, Agile later borrows $500,000 from Metro Bank, which files its financing statement. Agile defaults on the loans. Metro claims that at the time of its loan it was unaware of HFCs interest. Between these parties, who has priority to the collateral? Discuss your answer.
Agile Corporation borrows $1 million from Hi Finance Company (HFC). Agile signs a financing statement that describes the collateral, its inventory and proceeds, and HFC files the statement in the appropriate state office. Using the same collateral, Agile later borrows $500,000 from Metro Bank, which files its financing statement. Agile defaults on the loans. Metro claims that at the time of its loan it was unaware of HFCs interest. Between these parties, who has priority to the collateral? Discuss your answer.Explanation / Answer
Perfection is the legal process by which secured parties protect themselves against the claims of third parties who may wish to have their debts satisfied out of the same collatera,
In most situations, perfection is accomplished by filing a financing statement with the appropriate state or local official. A financing statement must contain
(1) the signature of the debtor,
(2) the addresses of the debtor and the creditor, and
(3) a description of the collateral by type or item
Whether a creditors security interest is perfected or unprotected may have serious consequences for the creditor if the debtor defaults on the debtor files for bankruptcy. Generally, the following rules apply when more than one party, or creditor, claims rights in the same collateral:
1. Conflicting unperfected security interest. When two conflicting security interest are unperfected, the first to attach has priority
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2. Perfected security interest versus unprotected security interest. When a security interest is perfected, it has priority over any unprotected interest.
3. Conflicting perfected security interest. two When or more creditors have perfected security interest in the same collateral, the interest that was first to perfect generally has priority.
4. Conflicting perfected security interest in commingled or processed goods. Goods to which two or more perfected security interest attach may be so manufactured or commingled that they lose their separate identities and become a single product or mass. One exception to these rules concerns a buyer in the ordinary course of business.
A buyer in the ordinary course of business is any person who in good faith, and without knowledge that a sale is in violation of the ownership rights or security interest of a third party in the goods, buys in the normal course of business from a person selling goods of that kind.
Such a buyer takes goods free of any security interest in a merchants inventory. In other words, the buyers interest takes priority over any other security interest in the merchants inventory. This is so even if the security interest is perfected and even if the buyer knows of its existence . Since Metro Bank was unaware that the sale was in violation of the ownership rights or security interest of a third party in the goods, they fall under the buyer in the ordinary course of business rule. This rule gives Metro Bank priority over any other security interest in Agile Corporation. If they had known of the pre-existing security interest, HFC would have priority of the security interest because they held they interest before Metro Bank.