Introduction

Read the overview below and complete the activities that follow.

This activity focuses on LO $19-5$ and $19-6$ in your text. The fictional scenario described in this activity will help you understand the distinctions among unsecured creditors, secured unperfected creditors, and secured perfected creditors, and how those distinctions affect their priority in repossessing collateral.

CONCEPT REVIEW:

The perfection of an interest is suppose to serve as protection of the secured party's interest in collateral from other creditors. However, sometimes conflicts arise between creditors who claim interest in the same collateral. A conflict may arise in many circumstances, but often disputes arise when a debtor files for bankruptcy.

Mini$-$Case:

Read the case and answer the questions that follow.

Suppose that on July $1,2019,$ Anne took out a $$50,000$ loan from PNC Bank to start two restaurants. That same day, because she had little collateral at the time, Anne also executed a security agreement with the bank for all after$-$acquired property as collateral, including all her inventory, fixtures, materials, and industrial$-$grade kitchen equipment.

While Anne was purchasing the kitchen appliances, she realized she still did not have enough funds to cover everything she needed. So$,$ on August $1,2019,$ she executed another security agreement with Industrial Kitchen Supplies, Incorporated and described all of the kitchen fixtures and appliances as collateral for her purchasing the equipment.

Once again, Anne's business planning skills failed her, and she ran out of money before opening her restaurants. So$,$ on September $1,2019,$ she went to another bank, Wells Fargo, and got a $$5,000$ loan via a security agreement. She used the kitchen equipment in her restaurant as collateral.

Unfortunately, in February $2020,$ Anne could not generate enough profits at her new restaurant to pay her monthly loan payments. That month, Anne defaulted on her loans to all three creditors.

PNC Bank perfected the interest $($filed a financial statement$)$ in the kitchen equipment exactly one month after Anne defaulted on her loan.

Industrial Kitchen Supplies, Incorporated never did perfect the interest in the kitchen equipment.

Wells Fargo perfected the interest $($filed a financial statement$)$ in the kitchen equipment immediately upon Anne's failure to make her loan payment in February $2020.$

$1$d$.$ Who in the scenario has the lowest priority in$...$

Who in the scenario has the lowest priority in repossessing the collateral?

Multiple Choice

PNC Bank, because it was the first company to loan Anne money.

Wells Fargo Bank, because it was the last company to loan Anne money.

Industrial Kitchen Supplies, Incorporated, because it originally owned the kitchen equipment.

Wells Fargo Bank and PNC Bank, because they are secured perfected creditors.

Industrial Kitchen Supplies, Incorporated, because it was the last secured creditor to perfect.