Debtor LLC (D) is a potato farming business registered in State X. Bank (B) holds a security interest, perfected by filing, in D’s existing and after-acquired equipment and farm products. B’s financing statement is effective for another four years. The security agreement between D and B also includes a future-advance clause, under which the present security interest secures later advances from B to D. However, B is not contractually obliged to fund any future advances.
D’s neighbor is D’s Farm LLC (D2), which grows all types of berries, plums, and cherries. D2 is also registered in State X. Financing Company (FC) holds a perfected security interest in D2’s existing and after-acquired equipment and farm products. FC’s financing statement was filed just before B filed its financing statement.
Wanting to expand farming operations, D acquires D2, consolidating D2 into its existing business. Pursuant to State X’s corporation law, this binds D to fulfill D2’s prior contracts, including the security agreement between D2 and FC.
For the first year, everything went great. D was happy with its purchase of D2, which D learned would consistently produce a fruit crop exceeding the profitability of D’s potato crop. D had sufficient funds both to continue meeting its own financial obligations and to pay those of D2’s that it assumed through the acquisition and consolidation. But due to some upfront costs attending D’s expansion into fruit farming, B did make two additional loans to D, one for $50,000 and another for $25,000.
The following year, State X experienced its worst draught in many decades. D’s crops suffered greatly because of the draught. To make matters financially worse for D, two of D’s former employees won a wrongful termination lawsuit against D. Judgment was entered against D in the amount of $100,000, and the former employees acquired the status of lien creditors against D’s equipment. The newly minted lien creditors immediately sent notice to D’s creditors of their liens attaching to D’s equipment.
Because of the disastrous effects of the draught, B decided to extend another $30,000 loan to D, exactly three months after the lien creditors gave notice to D’s creditors.
Unfortunately, the $30,000 loan was not enough to keep D’s business afloat. D could not meet its financial obligations and defaulted on its loans with B and FC. D has not repaid its last three loans from B, nor has it paid the $100,000 lien attached to its equipment.
- If D continues to not pay its debts to either B or FC, which of them has a superior claim to D’s equipment and farm products? Explain.
- Do D’s former employees, those who are now lien creditors, have priority over B to any of D’s equipment? Explain.