Question

Reed’s Appliances purchased $50,000 in inventory on credit from Whirlpool, with Whirlpool taking a security interest in Reed’s inventory on May 1, 2019. Whirlpool recorded a financing statement on May 3, 2019. The appliances were delivered by Whirlpool to Reed’s on May 14, 2019. On May 10, 2019, Reed’s Appliances opened a line of credit with FCB Bank for $500,000. FCB took a security interest in Reed’s inventory on May 10 and recorded a financing statement on May 11, 2019. Reed first drew on the FCB line of credit on May 15, 2019. Reed’s Appliances was insolvent by August 2019 and filed for bankruptcy. Which of the following statements is correct about the proceeds from the sale of Reed’s inventory?

Group of answer choices

FCB Bank has first priority in the proceeds.

FCB Bank has second priority because there was no draw on the credit line until May 15, 2019.

Because FCB did not notify Whirlpool of its interest before filing the financing statement, FCB cannot be a perfected secured party.

Whirlpool has first priority because its interest attached first.

Answer 1

FCB has first priority in the proceeds

First company has to pay off all bankruptcy and insolnency cost. After the company handles its bankruptcy costs, it starts paying off its business creditors. The company first pays off its secured creditors. Secured creditors gave loans based on physical pieces of property. These are debts like the mortgage on company buildings, leases on company cars and loans for unpaid pieces of equipment. Secured creditors get their money back first, usually by taking back their property. If this isn't enough to pay off the debt, the secured creditors get first dibs on any remaining company money.

In this case , Bank may be the secured creditor . so FCB has to be settled first.

And then the company has to settled its unsecured creditors like whirlpool

Assumtion: FCB is a secured creditor because normally banks give credit line by taking security.