Question

1. Suppose that RG defaults on both its loans. Please discuss which lender will have priority over RG's equipment, accounts payable, and inventory when it comes time to repossess and sell the collateral?

2. Suppose that RG files for Chapter 11 bankruptcy protection and the automatic stay. In response, CF filed a lawsuit for breach of the promissory note in which it demanded immediate re-payment in full or foreclosure on the collateral under the security agreement. Will CF succeed in prosecuting its lawsuit? Defend your answer by describing the likely outcome of the lawsuit.

3. Briefly describe how each creditor (lender) will be classified in the "reorganization plan" as either a secured or non-secured creditor and discuss which creditor you suspect will be in a superior position for securing the repayment, partial or in full, of the debt in bankruptcy?

Answer 1

The details of the loans are missing. However, through this write up you will be able to get your answer.

The order of Priority among creditors

#1: If Inventory rule applies, buyer of the goods in the ordinary course of business

#2: If there is a statutory lien (mechanic’s lien), holder of the statutory lien; however, this depends upon the state statute

#3: PMSI when attached and perfected simultaneously

• Always applies for consumer goods bought from a dealer (automatic perfection)
• Applies to perfection by filing within 20 days for other consumer goods and equipment. If later than 20 days, consider in the next category and use the order of filing of the various creditors to determine priority
• Generally, would not usually apply to inventory (unless filing took place before the debtor acquired the inventory)

#4: Among other perfections by filing or possession, order of filing or perfection (filed but not yet perfected is ok - consider the filing date)

• If one creditor has a perfection by filing, and another has perfection by possession, the one who has perfected first in their own way has priority over the other
• Remember to look at filing or perfection dates. Date of attachment is generally irrelevant.

#5: Other Perfected interests or judicial liens (court order/garnish wages) in order of perfection

#6: Order of attachment, if no one perfected

I have done the first question as per rules. Please note for each additional question you need to create separate questions.