A. An attached security interest B. A priority due to attachment C. A priority due to perfection
D. A priority due to chronological order E. A purchase money security interest F. A security interest in receivables G. A security interest perfected by filing H. A security interest perfected without filing I. No security interest
NUMBER 2
Number 2 consists of 6 items. Select the best answer for each item. Answer all items. Your grade will be based on the total number of correct answers.
On January 2, 1994, Gray Interiors Corp., a retailer of sofas, contracted with Shore Furniture Co. to purchase 150 sofas for its inventory. The purchase price was $250,000. Gray paid $50,000 cash and gave Shore a note and security agreement for the balance. On March 1, 1994, the sofas were delivered. On March 10, 1994, Shore filed a financing statement.
On February 1, 1994, Gray negotiated a $1,000,000 line of credit with Float Bank, pledged its present and future inventory as security, and gave Float a security agreement. On February 20, 1994, Gray borrowed $100,000 from the line of credit. On March 5, 1994, Float filed a financing statement.
On April 1, 1994, Dove, a consumer purchaser in the ordinary course of business, purchased a sofa from Gray.
Dove was aware of both security interests.
3Q-8 Required:
Items 1 through 6 refer to the above fact pattern. For each item, determine whether A, B, or C is correct.
1. Shore’s security interest in the sofas attached on A. January 2, 1994.
B. March 1, 1994.
C. March 10, 1994.
2. Shore’s security interest in the sofas was perfected on A. January 2, 1994.
B. March 1, 1994.
C. March 10, 1994.
3. Float’s security interest in Gray’s inventory attached on A. February 1, 1994.
B. March 1, 1994.
C. March 5, 1994.
4. Float’s security interest in Gray’s inventory was perfected on A. February 1, 1994.
B. February 20, 1994.
C. March 5, 1994.
5. A. Shore’s security interest has priority because it was a purchase money security interest.
B. Float’s security interest has priority because Float’s financing statement was filed before Shore’s.
C. Float’s security interest has priority because Float’s interest attached before Shore’s.
6. A. Dove purchased the sofa subject to Shore’s security interest.
B. Dove purchased the sofa subject to both the Shore and Float security interests.
C. Dove purchased the sofa free of either the Shore or Float security interests..
NUMBER 3
Mead, a junior member of a CPA firm's audit staff, was assigned to assist in auditing Abco Electronics, Inc.'s financial statements. Abco sells various brands of computer equipment to the general public, and to distributors who sell the equipment to retail customers for personal and business use. One of Mead's assignments was to evaluate the following transactions:
x On September 1, Abco sold a CDM computer out of its inventory to Rice, who intended to use it for business purposes. Rice paid 25% of the purchase price and executed and delivered to Abco a promissory note for the balance. A security agreement was signed only by the Abco sales representative. Abco failed to file a financing statement. Rice is in default under the promissory note. Rice claimed that Abco does not have an effective security interest in the computer because Rice did not sign the security agreement, and because Abco did not file a financing statement.
x On August 18, Abco sold a computer to Baker, who intended to use it for business inventory and accounts payable control, and payroll processing. Baker paid 20% of the purchase price and executed and delivered to Abco a promissory note for the balance and a security agreement covering the computer. Abco filed a financing statement on August 27. On August 25, Baker borrowed $5,000 from Condor Finance Co., giving Condor a promissory note for the loan amount and a security agreement covering the computer. Condor filed a financing statement on August 26. Baker defaulted on the promissory note given to Abco and its obligation to Condor.
Condor has asserted that its security interest in the computer is superior to Abco's.
Required:
State whether the claims of Rice and Condor are correct and give the reasons for your conclusions.
3Q-9
NUMBER 4
Wizard Computer Co. sells computers to the general public. On April 30, Wizard financed the purchase of its computer inventory with National Bank. Wizard executed and delivered a promissory note and a security agreement covering the inventory. National filed a financing statement on the same day.
On May 1, Wizard sold a computer out of its inventory to Kast, who intended to use it to do some household budgeting. Kast made a 10% downpayment toward the purchase price. Kast executed and delivered to Wizard a promissory note for the balance and a security agreement covering the computer. Kast was aware that Wizard financed its inventory with National. Wizard did not file a financing statement.
On May 6, Kast, who was dissatisfied with the computer, sold it on credit to Marc, who intended to use it to assist in family budgeting. Marc, who was unaware that Kast had purchased the computer on credit, paid 25% of the purchase price and executed and delivered to Kast a promissory note for the balance and a security agreement covering the computer. Kast did not file a financing statement.
On May 12, Marc borrowed $6,000 from Alcor Finance. Marc gave Alcor a promissory note for the loan amount and a security agreement covering the computer and other household appliances owned by Marc. Alcor did not file a financing statement.
Marc failed to pay Alcor or Kast. In turn, Kast has been unable to pay Wizard. On June 2, Wizard defaulted on its obligation to National.
Kast and Marc take the following positions:
x Kast asserts that the computer was purchased from Wizard free of National's security interest.
x Marc asserts that the computer was purchased from Kast free of Wizard's security interest.
x Marc asserts that Alcor's security interest is unenforceable against Marc because Alcor failed to file a financing statement.
Required:
For each assertion, indicate whether it is correct, and set forth the reasons for your conclusion.
NUMBER 5
Despard Finance Company is a diverse, full-line lending institution. Its "Problems & Potential Litigation" file revealed the following disputes involving loans extended during the year of examination:
x Despard loaned Fish $4,500 to purchase a $5,000 video recording system for his personal use. A note, security agreement, and financing statement, which was promptly filed, were all executed by Fish. Unknown to Despard, Fish had already purchased the system from Zeals Department Stores the previous day for $5,000.
The terms were 10% down, the balance monthly, payable in three years, and a written security interest granted to Zeals. Zeals did not file a financing statement until default.
x Despard loaned Moderne Furniture Co. $13,000 to purchase certain woodworking equipment. Moderne did so.
A note, security agreement, and financing statement were executed by Moderne. As a result of an oversight the financing statement was not filed until 30 days after the loan-purchase by Moderne. In the interim Moderne borrowed $11,000 from Apache National Bank using the newly purchased machinery as collateral for the loan.
A financing statement was filed by Apache five days prior to Despard's filing.
Required: Answer the following, setting forth reasons for any conclusions stated.
What are the priorities among the conflicting security interests in the same collateral claimed by Despard and the other lenders?
3Q-10
NUMBER 6
Dunn & Co., CPAs, is auditing the 1987 financial statements of its client, Safe Finance. While performing the audit, Dunn learned of certain transactions that occurred during 1987 that may have an adverse impact on Safe's financial statements. The following transactions are of most concern to Dunn:
x On May 5, Safe sold certain equipment to Lux, who contemporaneously executed and delivered to Safe a promissory note and security agreement covering the equipment. Lux purchased the equipment for use in its business. On May 8, City Bank loaned Lux $50,000, taking a promissory note and security agreement from Lux that covered all of Lux's existing and after-acquired equipment. On May 11, Lux was involuntarily petitioned into bankruptcy under the liquidation provisions of the Bankruptcy Code and a trustee was appointed. On May 12, City filed a financing statement covering all of Lux's equipment. On May 14, Safe filed a financing statement covering the equipment it had sold to Lux on May 5.
x On July 10, Safe loaned $600,000 to Cam Corp., which used the funds to refinance existing debts. Cam duly executed and delivered to Safe a promissory note and a security agreement covering Cam's existing and after-acquired inventory of machine parts. On July 12, Safe filed a financing statement covering Cam's inventory of machine parts. On July 15, Best Bank loaned Cam $200,000. Contemporaneous with the loan, Cam executed and delivered to Best a promissory note and security agreement covering all of Cam's inventory of machine parts and any after-acquired inventory. Best had already filed a financing statement covering Cam's inventory on June 20, after Best agreed to make the loan to Cam. On July 14, Dix, in good faith, purchased certain machine parts from Cam's inventory and received delivery that same day.
Required: Define a purchase money security interest. In separate paragraphs, discuss whether Safe has a priority security interest over:
x The trustee in Lux's bankruptcy with regard to the equipment sold by Safe on May 5.
x City with regard to the equipment sold by Safe on May 5.
x Best with regard to Cam's existing and after-acquired inventory of machine parts.
x Dix with regard to the machine parts purchased on July 14 by Dix.
NUMBER 7
On October 30, 1995, Dover, CPA, was engaged to audit the financial records of Crane Corp. a tractor manufacturer. Dover reviewed a security agreement signed by Harper, a customer, given to Crane to finance Harper’s purchase of a tractor for use in Harper’s farming business. On October 1, 1995, Harper made a down payment and gave Crane a purchase money security interest for the balance of the price of the tractor. Harper executed a financing statement that was filed on October 10, 1995. The tractor had been delivered to Harper on October 5, 1995. On October 8, 1995, Harper gave Acorn Trust a security agreement covering all of Harper’s business equipment, including the tractor. Harper executed a financing statement that Acorn filed on October 9, 1995.
Required:
As the auditor on this engagement, write a memo to the partner-in-charge identifying, explaining and stating your conclusions about the legal issues pertaining to the security interest.
The memo should address:
x When Crane’s security interest was perfected and whether it had priority over Acorn’s security interest.
3S-1