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Secured Transactions

Exam 2
30 minutes

Fact Pattern

Three years ago, D borrowed $1 million from B, a bank, to start “DogBar,” a bar where dog owners and their dogs could meet up and socialize with one another. Both D and B signed the loan agreement, which provided that D granted B a security interest in D’s “equipment, accounts, and deposit accounts, now owned and later acquired.” 

That same day, B filed a properly completed finance statement in the appropriate state office; the statement reflected the granted security interest. B also had D open a business checking account at B, where D would deposit the $1 million. With the cash from the loan, D purchased alcohol, bar furniture, and kitchen equipment. 

After two years, D decided to expand its business to include a luxury dog boarding facility. To properly cool the dogs’ sleeping rooms, D needed to buy air-conditioning units to install directly into the window of each room. But D lacked sufficient cash to buy the units directly from a seller, and D had no line of credit available to obtain the cash. Worse yet, no seller would sell the units to D on credit. Accordingly, D requested an additional $25,000 in financing from B. B denied this request, so D applied for a $25,000 loan from Finance Company (“FC”), with the loan money to go directly towards buying the air-conditioning units. 

On June 1, FC agreed to lend D the $25,000, but on the condition that D sign and deliver a security agreement containing the following language: “D grants to FC a security interest in all of D’s personal property, especially those certain air-conditioning units to be located at D’s dog boarding facility.” FC also required D to authorize a financing statement containing a collateral description identical to that of the security agreement; however, FC did not file a financing statement at that time. Instead, FC first distributed the loan proceeds directly to D, and then D immediately deposited the proceeds into its business checking account with B. 

On June 2, D received notice that a utility company had obtained a judgment against it in the amount of $1,500. This took place one day after D deposited the $25,000 check, and before D could purchase the air-conditioning units. The reason for the judgment was that D had failed to pay its utility bills for the past six months. 

Under state law, the judgment afforded the utility company a judgment lien against all of D’s personal property. The judgment lien took effect on June 5. (Assume that, under Article 9 of the Uniform Commercial Code, or UCC, this qualifies the utility company as a lien creditor with respect to all of D’s personal property).

With this news, D decided to buy only half as many air conditioning units as it initially wanted, thinking that saving roughly half the money from FC’s loan might be wise. On June 7, D ordered the units and gave notice to FC that it had done so. On June 8, FC filed its properly completed financing statement in the appropriate state office. When the air-conditioning units arrived on June 15, D had them installed in its new dog-boarding facility. The installation was very easy, with little damage or alteration to the existing window structures. 

D is now in default on its repayment obligations to both B and FC, and the utility company’s $1,500 lien on D’s personal property remains in place.


Questions

  1. Identify the status and priority of B, FC, and the utility company, concerning the following items: D’s unopened bottles of alcohol, the kitchen equipment, the window air-conditioning units, and D’s business checking account. Explain.

Question 1

Identify the status and priority of B, FC, and the utility company, concerning the following items: D’s unopened bottles of alcohol, the kitchen equipment, the window air-conditioning units, and D’s business checking account. Explain.

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