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Secured Transactions

Exam 5
30 minutes

Fact Pattern

D is a veterinarian practice in State X; the practice is currently owned and staffed by one veterinarian. D is a registered limited liability business entity in State X. At this point, D’s only creditor is B, a bank. B has a perfected security interest in all of D’s equipment and accounts, those that D owned at the time the security agreement was entered and those that D may later acquire. B’s security interest is perfected by a properly filed financing statement, effective until March 1, 2018.

D decides to expand its business and add three more veterinarians to its practice, which will require a bigger facility. As D assesses its options, it discovers that building a completely new facility in State Y will be cheaper than expanding its existing facility in State X. 

To that end, D sells the current facility and uses the proceeds to help finance the new building. $3,000,000 is the total cost to purchase the land in State Y and construct the new building. D finances this $3,000,000 expense with $600,000 of its own money, and then borrows the rest from FC, a financing company. 

To secure the obligation to FC, D grants FC a mortgage on both the State Y land and all structures erected on the land. The mortgage is properly recorded and properly identified as a construction mortgage in the appropriate county real-estate records office.

Afterward, D decided to purchase some new equipment for its new facility on credit from CompuTom, a company specializing in computed tomography (CT) scanners and other diagnostic equipment (the CT equipment). CompuTom took a security interest in the equipment D purchased from it, and D immediately and properly perfected this security interest.

The new construction goes well, as does integrating all the new equipment, including the CT equipment, into the State Y facility. The facility is constructed to fit and secure specific equipment into various rooms. As a result, the CT equipment is attached to the building in such a way that, under State Y’s law, it becomes a fixture. In State Y, this means that an interest in the equipment now exists in favor of any person with an interest in the building to which the equipment is attached 

D decides to retain its name, “D,” in its new State Y location. It also chooses to reincorporate in State Y. So, on March 1, 2017, D’s veterinarians, its principals, form a State Y limited liability business entity, into which they merge D. The new entity is also named “D.” The merger effectuates a transfer of the collateral from former D, based in State X, to new D, now based in State Y. No creditors take any further steps to secure their debt. 

Assume that it is now December 2017. D has suffered financial difficulties and defaulted on its obligations to B, FC, and CompuTom.


Questions

  1. Which party has priority to (1) the CT equipment and (2) the other equipment in the new State Y facility? Explain.

Question 1

Which party has priority to (1) the CT equipment and (2) the other equipment in the new State Y facility? Explain.

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