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Secured Transactions

Exam 8
30 minutes

Fact Pattern

Two years ago, PT Treatment Inc. (PTT), incorporated in State A, decided to build a new $90 million proton-therapy cancer treatment center in State A. The total cost to PTT for purchasing the land and constructing the building to house the treatment facility was $30 million. PTT financed the purchase and construction with $10 million of its own money and $20 million that it borrowed from Bank. To secure its obligation to Bank, PTT granted Bank a mortgage on the land and all structures erected on the land. The mortgage was properly recorded in the county real estate records office, but it was not identified as a construction mortgage.

Two months after the mortgage was recorded, PTT finalized an agreement for the purchase of proton-therapy equipment from Ion Medical Systems (Ion) for $60 million. PTT made a down payment of $14 million and signed a purchase agreement promising to pay the remaining $46 million in semi-annual payments over a 10-year period. The purchase agreement provided that Ion has a security interest in the proton-therapy equipment to secure PTT’s obligation to pay the remaining purchase price. On the same day, Ion filed a properly completed financing statement with the office of the Secretary of State of State A (the central statewide filing office designated by statute), listing “PT Treatment Inc.” as debtor and indicating the proton-therapy equipment as collateral.

Shortly thereafter, Ion delivered the equipment to PTT and PTT’s employees installed it. The equipment was attached to the building in such a manner that, under State A law, it is considered a fixture and an interest in the equipment exists in favor of anyone with an interest in the building.

The new PTT Cancer Treatment Center opened for business last year. Unfortunately, it has not been an economic success. For a short period, PTT contracted with State A Oncology Associates (Oncology) for the latter’s use of the proton-therapy equipment pursuant to a lease agreement, but Oncology failed to pay the agreed fee for the use of the equipment, so PTT terminated that arrangement. To date, PTT has been unsuccessful in its efforts to collect the amounts that Oncology still owes it. PTT’s own doctors and technicians have not attracted enough business to fully utilize the cancer treatment center or generate sufficient billings to meet PTT’s financial obligations. PTT currently owes Ion more than $30 million and is in default under the security agreement. Ion is concerned that PTT will soon declare bankruptcy.

In a few days, Ion will be sending a technician to the PTT facility to perform regular maintenance on the equipment. Ion is considering instructing the technician to complete the maintenance and then disable the equipment so that it cannot be used by PTT until PTT pays what it owes.


Questions

  1. 1. In view of PTT’s default, if Ion disables the proton-therapy equipment, will it incur any liability to PTT? Explain.

    2. If PTT does not pay its debts to either Bank or Ion, which of them has a superior claim to the proton-therapy equipment? Explain.

    3. Does Ion have an enforceable and perfected security interest in any of PTT’s assets other than the proton-therapy equipment? Explain.

Question 1

1. In view of PTT’s default, if Ion disables the proton-therapy equipment, will it incur any liability to PTT? Explain.

2. If PTT does not pay its debts to either Bank or Ion, which of them has a superior claim to the proton-therapy equipment? Explain.

3. Does Ion have an enforceable and perfected security interest in any of PTT’s assets other than the proton-therapy equipment? Explain.

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