Assume the facts in Question 1. On June 1, 2008, Revolving Credit Bank takes over the revolving line of credit from Bank of Hope and acquires Bank of Hope’s security interest in Newcorp’s accounts receivable and inventory. Beginning in early 2009, due to a combination of internal and external conditions, Newcorp’s business failed to generate sufficient revenue to meet its debt obligations. The loan agreement between Newcorp and Revolving Credit Bank contains an advance clause, which states that Revolving Credit Bank may, at its discretion, advance up to $2 million based on eligible accounts receivable and inventory. Revolving Credit Bank informed Newcorp that Newcorp has failed to maintain certain financial covenants contained in their credit agreement. Without declaring a default, Revolving Credit Bank then required Newcorp to establish a locked-box arrangement with the bank so that all payments made to Newcorp could be used first to repay any advances outstanding. On March 1, 2009, Newcorp’s treasurer called Revolving Credit Bank’s account officer and asked for a $350,000 advance to cover checks that would be presented to the bank that day. Revolving Credit Bank refused to lend the full amount requested but did advance $200,000 to pay certain suppliers.

a. You are the manager of one of Newcorp’s trade creditors that has not been paid. Do you have any rights against Revolving Credit Bank? In April 2009, Newcorp began to have difficulty meeting its monthly repayment obligations on the term loan from the Bank of Hope. Although Newcorp never missed a payment, the payments were all a few days late. In May 2009, Carlos Banker called the treasurer at Newcorp, assuring him that the Bank of Hope “would stand by the company” and that Newcorp should do whatever it could to keep the payments current. In September 2009, Revolving Credit Bank, concerned about continuing deteriorating conditions, decided to initiate foreclosure proceedings. The Bank of Hope followed suit only after Revolving Credit Bank began foreclosure proceedings. 

b. You are a manager of Newcorp. What defenses would you raise against Revolving Credit Bank’s foreclosure? Against the Bank of Hope’s foreclosure?

c. You are a manager of Revolving Credit Bank. How would you respond to Newcorp’s arguments?

d. You are a manager of the Bank of Hope. How would you respond to Newcorp’s arguments? Should the Bank of Hope proceed to foreclose against the plant? What recourse does the Bank of Hope have against Newcorp if it does not foreclose? Does it have any recourse against any other party?

e. You are a manager of ABC and hold a junior deed of trust on the property. How would you react to the Bank of Hope’s latest action?