Logourl black

Secured Transactions

Exam 6
30 minutes

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

  1. 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.
  2. 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.
  3. 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.

Question 1

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.

Question 2

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.

Question 3

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.

Here's why 102,000 law students rely on our practice exams:

  • Written by law professors.
  • Uniform format for all our exams.
  • Model answers included for every exam.
  • Use our exams to prepare for the Multistate Essay Examination (MEE).
  • Unlimited access to 216 exams with model answers in 12 subjects.
  • Top-notch customer support.
  • 24/7 access on desktop, tablet, or mobile devices.
Start Your Free Trial Now