[jenpen]

Question #: 1666 Category: 2C3 Secured Transactions

Burn Manufacturing borrowed $500,000 from Howard Finance Co., secured by Burn’s present and future inventory, accounts receivable, and the proceeds thereof. The parties signed a financing statement that described the collateral and it was filed in the appropriate state office. Burn subsequently defaulted in the repayment of the loan and Howard attempted to enforce its security interest. Burn contended that Howard’s security interest was unenforceable. In addition, Green, who subsequently gave credit to Burn without knowledge of Howard’s security interest, is also attempting to defeat Howard’s alleged security interest. The security interest in question is valid with respect to:

A.

both Burn and Green.

B.

neither Burn nor Green.

C.

Burn but not Green.

D.

Green but not Burn.

You answered C. The correct answer is A.

Where multiple security interests exist in the same collateral, priority is given based on the time of filing of financing statements. Howard Finance would have priority over Green, but Green still has a valid interest.

I am thinking there might be an error in this question. Should the options say Howard instead of Burn? Burn is the one who borrowed money from Howard and Green…right? Or am I just really confused on this topic? Help!

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[Jim Deal]

I don't like this question at all as you have to make an assumption based upon a lack of information (I really hate when they do that). In my opinion these types of questions aren't actually probing your knowledge of the subject but I'll give it a shot.

I could be missing something but from my understanding of it:

Howard Finance —-($500,000)—-> Burn

Burn –(A/R, Invent, etc.)—> Howard Finance

Subsequently:

Green —-(Credit)—-> Burn

Burn —-(???)—-> Green

---

It states that Green extended Burn the line of credit without knowledge that Burn had a secured loan with Howard Finance. We are not given any additional information with respect to any limitations carried by this line of credit (secured/unsecured) or whether Green should have known (filing date) so we have to assume that Green has valid interest. What this would come down to is which parties perfected or filed first on the security interests in Burn. Additionally, any proceeds from the disposal of these assets in excess of what is owed to Howard would then go to Green assuming they carry a secured interest (or whom ever is next in line). None of that matters however because they are simply asking who has a valid interest in Burns assets.

The parties who have a valid interest are: Howard Finance, Green, and obviously Burn (the assets belong to them). In an exam setting I easily could have selected the wrong answer.

[jenpen]

Hmm. I think I understand. I wasn't thinking that the debtor could have a secured interest in their property, but I suppose that does make sense. Thanks for the insight! Much appreciated.

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[Author]

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