Question

Best Yogurt Corporation orders refrigeration equipment from Cold Storage, Inc., which has an unperfected security interest in the equipment until it is paid for. Meanwhile, Best Yogurt takes out a loan from Dependable Credit, Inc., subject to a security interest in Best Yogurt’s building and equipment, which Dependable Credit perfects. Best Yogurt files a petition in bankruptcy for relief in a liquidation proceeding. If the petition is granted, in what order will the creditors be paid?

Answer 1

A perfected security interest is any secure interest in an asset that cannot be claimed by any other party. The interest is perfected by registering it with the appropriate statutory authority, so that it is made legally enforceable and any subsequent claim on that asset is given a junior status.

When an entity perfects security interests, this gurantees that the party who perfected the interest is given prominence when other parties present their claims to the interest. When the bankruptcy is approved, it becomes hard for multiple parties to make back what they are already owed. However, since perfecting their security interests, Dependable Credit will be considered first for repayment and recovery. The second number will be of Cold Storage.