Reference no: EM132446206

CONCEPT REVIEW:

The perfection of an interest is supposed to serve as protection of the secured party's interest in collateral from other creditors. However, sometimes conflicts arise between creditors who claim interest in the same collateral. A conflict may arise in many circumstances, but often disputes arise when a debtor files for bankruptcy.

Read the case and answer the questions that follow.

Suppose that on July 1, 2010, Anne took out a $50,000 loan from PNC Bank to start two restaurants. That same day, because she had little collateral at the time, Anne also executed a security agreement with the bank for all after-acquired property as collateral, including all her inventory, fixtures, materials, and industrial-grade kitchen equipment.

While Anne was purchasing the kitchen appliances, she realized she still did not have enough funds to cover everything she needed. So, on August 1, 2010, she executed another security agreement with Industrial Kitchen Supplies, Inc. and described all of the kitchen fixtures and appliances as collateral for her purchasing the equipment.

Once again, Anne's business planning skills failed her, and she ran out of money before opening her restaurants. So, on September 1, 2010, she went to another bank, Wells Fargo, and got a $5,000 loan via a security agreement. She used the kitchen equipment in her restaurant as collateral.

Unfortunately, in February 2011, Anne could not generate enough profits at her new restaurant to pay her monthly loan payments. That month, Anne defaulted on her loans to all three creditors.

PNC Bank perfected the interest (filed a financial statement) in the kitchen equipment exactly one month after Anne defaulted on her loan.

Industrial Kitchen Supplies, Inc. never did perfect the interest in the kitchen equipment.

Wells Fargo perfected the interest (filed a financial statement) in the kitchen equipment immediately upon Anne's failure to make her loan payment in February 2011.

As to each question, provide the correct answer AND explain why it is the correct answer.

1.  Generally, who has priority over unsecured creditors?

a.  A buyer in the ordinary course of business.

b.  Debtors

c.  Automatically perfected parties.

d.  Parties with secured interests.

e.  A buyer in the ordinary course of business.

f.  None of these.

2.  If both parties are secured, such as with PNC Bank and Industrial Kitchen Supplies, the determination of priority to collateral moves to considerations of _______________.

a.  Whether the creditor is an individual or merchant.

b.  Perfection of the security interest only.

c.  Time and amount of each party's loan.

d.  The amount of each party's loan.

e.  Time and perfection.

3.  Who in this scenario has the highest priority in repossessing the collateral?

a.  PNC Bank, because it was a secured creditor and the first to loan money to Anne.

b.  PNC Bank, because it loaned Anne the most money.

c.  Wells Fargo Bank and PNC Bank, equally, because they were secured perfected creditors.

d.  Industrial Kitchen Supplies, Inc., because it was a secured creditor and originally owned the kitchen equipment.

e.  Wells Fargo Bank, because it was the a secured creditor and was the first to perfect.

Second Question:

CONCEPT REVIEW:

There are many different types of relief for bankruptcy proceedings. Before a debtor files for one specific type of relief, the clerk of courts must give the debtor written notice of the other types of relief available. This requirement helps to ensure that the debtor has full information about the bankruptcy process.

Read the case, and then answer the questions that follow.

Rodney (a fictional person) was self-employed, running a successful business, seemingly healthy, and never thought he would have financial problems. Being self-employed, he lacked health insurance. One day on the job, Rodney suffered a heart attack and was hospitalized for a week. As a result, he owed more than $100,000 in hospital and medical bills to the hospital. After the heart attack, Rodney could not work in his physically demanding line of work, and his business suffered dramatically. The bills and mortgage payments kept piling up, and Rodney was sinking fast. On top of the medical bills and mortgage, he owed thousands of dollars to multiple companies and creditors. Rodney considered selling his house to get out of the financial crisis he was in, but the value of the house had dropped significantly. After much consideration, Rodney decided to file for Chapter 7, bankruptcy. In the end, he decided he would rather have a bankruptcy on his record instead of dealing with a mountain of debt.

For each question, provide the correct answer and a complete explanation of why it is the correct answer.

1.  In Chapter 7 bankruptcy, ___________occurs when a debtor turns over all assets to a trustee, an individual who takes over administration of the debtor's estate.

a.  An order of relief

b.  An automatic stay

c.  Relief

d.  Liquidation

e.  Bankruptcy

2.  Who is defined as a debtor for liquidation purposes under Chapter 7? Can Rodney file for Chapter 7 bankruptcy?

a.  Banks; Rodney cannot file.

b.  Individuals; Rodney can file.

c.  Health Maintenance Organizations; Rodney cannot file.

d.  Partnerships: Rodney cannot file

e.  Corporations; Rodney cannot file

3.  Suppose that Rodney did not intend to file for voluntary liquidation. Could he be forced into bankruptcy under Chapter 7?

a.  No, he must file the Chapter 7 bankruptcy himself.

b.  Yes, because he has more than 12 creditors.

c.  Yes, because he has a single creditor with a claim of more than $12,300 in debt.

d.  No, because people who are self-employed cannot be forced into filing for Chapter 7.

4. Rodney has a lot of creditors that are trying to sue him for the debt he owes. One benefit of filing for Chapter 7 is that once a petition is filed, the code provides for a(n) _______________for almost all creditor litigation against the debtor.

a.  Liquidation

b.  Order of relief

c.  Creditor's meeting

d.  Preferential payment

e.  Automatic stay

5.  If the filing of Rodney's voluntary petition is proper, the petition automatically becomes a(n) 

a.  Fraudulent transfer

b.  Creditor's meeting

c.  Preferential payment

d.  Discharged debt

e.  Order of relief.

6.  Suppose Rodney fails to show up at his creditors' meeting with his creditors because he is scared to meet with the hospital representatives. What is a possible consequence of his failure to show?

a.  His creditors will be allowed to sue him for failure to show.

b.  The court may refuse to grant the bankruptcy

c.  Rodney will be charged with a criminal offense.

d.  There is no penalty for missing a creditor's meeting.

e.  His appointed trustee will be penalized, but Rodney will not.