[Anonymous]

Hi,

I’m a bit confused about the priorities ranking between conflicting interests in collateral, and need some help.

Here’s the Wiley question:

Knox operates an electronic store as a sole proprietor. On April 5, 2008, know was involuntarily petitioned into bankruptcy under the liquidation provisions of the Bankruptcy Code. On April 20, a trustee in bankruptcy was appointed an an order for relief was entered. Knox’s nonexempt property has been converted to cash, which is available to satisfy the following claims and expenses as may be appropriate:

Claims and Expenses:

1.Claims by Dart corp. (one of knox’s suppliers) for computers ordered on April 6, 2008, and delivered on credit to Knox on April 10, 2008. $20,000

2.Fee earned by the bankruptcy trustee $15,000

3.Claim by Boyd for a deposit given to Knox on April 1, 2008 for a computer Boyd purchase for personal use but that had not yet been received by Boyd. $1,500

4.Claim by Noll Co. for the delivery of stereos to Knox on credit. The Stereos were delivered on April 4, 2008 and a financing statement was properly filed on April 5, 2008. These stereos were sold by the trustee with Noll’s consent for $7,500, their, fair market value. $5,000

5.Fees earned by the attorneys for the bankruptcy estate. $10,000

6.Claims by unsecured general creditors. $1,000

The cash available for distribution includes the proceeds from the sale of the stereos.

What amount will be distributed to Boyd if the cash available for distribution is $50,800?

Answer: 800

a. 1,800

b. 1,500

c. 800

d. 480

According to the answer, this was the priority ranking (from highest to lowest):

4, 2 and 5, 1, 3, 6

Here’s why i’m confused w/ the answer.

According to the Becker Book (R6-35):

The priority ranking is as follows (from highest priority to lowest priority):

A. A buyer in ordinary course of business of inventory that serves as collateral for a security agreement created by the seller; holders in due course of negotiable instruments; and holders of possessory liens;

B. The holder of a properly perfected PMSI in the collateral;

C. The holder of a perfected security interest in, or a judicial lien that has attached to, the collateral (including the lien of a trustee in bankruptcy);

D. The holder of an unperfected security interest in the collateral; and

E. The debtor.

I would think that Boyd would get 1,500 back because he’s a buyer in the ordinary course of business, so he should be the first in line to collect.

Based on my interpretation of the Becker material, I would think this would be ranking order (from highest to lowest):

3-Because Boyd is a buyer in the ordinary course of business. Agreeds to Becker notation A.

4-Because Noll Properly filed a financing statement. Agreeds to Becker notation C

2 and 5-Agreeds to Becker Notation C

6-Unsecured general creditor. Agreeds to Becker notation E.

1-Agreeds to Becker notation E.

If anyone can help, Thanks!