Secured Transactions
Exam 6
Fact pattern
D is a multi-billion-dollar wholesale retailer. D, in its hundreds of stores throughout the United States, sells everything from large packages of wool socks and light bulbs to fresh flowers and roasted coffee. D is best known for its low prices and bulk quantities. However, D also carries higher-priced, higher-end items in select stores.
D sometimes takes these higher-priced items on consignment. For example, since opening in 2006, D has sold products from a supplier called LS on consignment. LS is a seller of luxury items like fine jewelry and home furnishings. At any given time, D carries about 50 LS items in each of 50 select stores.
The minimum price for an LS item is $1,100, while the most expensive item costs $25,000. Each of these items is marked with LS’s logo, but the items do not otherwise inform D’s customers or creditors that D has taken them on consignment. In other words, the items on consignment are displayed and marketed identically to the thousands of other items that D owns and sells. LS does not take a security interest in these items, believing that it, not D, owns them. For the same reason, LS has not filed a financing statement.
In 2008, to finance a business expansion, D executes a loan agreement with B, a bank. Pursuant to the agreement, B takes and then promptly and properly perfects a security interest in “all of D’s equipment, inventory, and their proceeds, now owned or hereafter acquired.” B’s current financing statement is good through March 2018. Assume B has properly filed a continuation statement since it filed the original financing statement in 2008.
D also leases the shelving units and scaffolding in its large, warehouse-like stores from EL, an equipment-leasing company. Assume that this is a true lease, and not a disguised sale. EL has never filed a financing statement. The lease agreement between D and EL was executed on June 15, 2008, and is set to terminate in June 2020.
Due to illegal hiring practices and misleading marketing materials, D finds itself cloaked in scandal and facing resulting nationwide boycotts. It subsequently defaults on all its financial obligations. Assume that D files a bankruptcy petition under Chapter 7 as of today, June 15, 2017.
Questions
- As of today’s date, June 15, 2017, does LS or B enjoy superior priority to the current stock of LS fine items at D’s stores, and what might the inferior party have done differently, to attain priority over the other? Explain.
- As of today’s date, June 15, 2017, does B or EL enjoy superior priority to the EL shelving units and scaffolding in D’s stores? Explain.
- If D is unsure what it owes to B, and does not want to wait for the bankruptcy trustee to find out, what action may it take to acquire this information? Explain.