Distribution of Debtors Estate

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  • #3293702

    Can someone tell me why “Tailors” gets priority over Commercial?

    Bridget opened a clothing store with a loan from Coastal Bank of $500,000. Coastal Bank took a security interest in Bridget’s inventory on January 13, 2019. Coastal filed a financing statement on January 15, 2019. Commercial Ventures sold clothing racks, mirrors, and movable shelving to Bridget for $150,000 on credit, taking a security interest in the equipment it had delivered. Commercial and Bridget executed a security agreement on January 15, 2019, and Commercial filed a financing statement that same day. Blue Jay Clothing sold Bridget $100,000 in inventory on February 1, 2019, with a security interest in Bridget’s inventory. Blue Jay filed a financing statement on February 15, 2019, and the Blue Jay clothing was delivered to Bridget on February 20, 2019. Blue Jay then notified Coastal of its interest in Bridget’s inventory upon delivery. Bridget struggled for the following four months, and on June 24, 2019, Bridget was able to purchase $50,000 in new display items from Tailors, Inc. on credit. Tailors had Bridget sign a security agreement on June 25, 2019, and Tailors delivered the display items (racks and shelving) on June 26, 2019. Bridget filed for Chapter 7 bankruptcy on July 2, 2019, and Tailors filed a financing statement on July 5, 2019. The following results from the bankruptcy trustee’s liquidation of Bridget’s business.

    Sale of equipment $ 50,000
    Sale of inventory $150,000
    Cash on hand $ 20,000
    Sale of other assets $ 50,000
    The following amounts are due each of Bridget’s creditors.

    Coastal $150,000
    Blue Jay $ 50,000
    Tailors $50,000
    Commercial $50,000
    The fees for the bankruptcy trustee and attorney are $30,000. How much will be distributed to Commercial?

    Explanation: Correct! Coastal receives the $150,000 from the sale of inventory, leaving Blue Jay owed $50,000. Tailors receives the $50,000 from the equipment sale, leaving Commercial owed $50,000. The cash and other assets bring in $70,000, but the trustee expenses must be paid, leaving $40,000. The two creditors left to share pro rata are Blue Jay and Commercial with $50,000 each. Their pro rata share is half the remaining $40,000, or $20,000.

    AUD - 80
    BEC - 82
    FAR - 76
    REG - NINJA in Training
    Richard Alderete
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