Reference no: EM131899120

Instructions: Written Assignment :

Recall that Kyle and his family own a successful produce business near Whitehouse, AL, close to Hamilton and Fayette. Their produce (fresh and canned vegetables, fruits, etc.) is sold under their own label, Alabama Sunshine. Kyle likes the small town environment of Whitehouse/Hamilton/Fayette where business is usually done based on relationships and a handshake and everyone knows everyone else's business, both good and bad.

Although Kyle grows the produce that he sells in his market and ships to Alabama Best Food, Inc. (recall WA1 and WA2), he wants to expand the merchandise in his store to include dry goods, garden supplies and equipment, and some hardware. He approaches his high school buddy, Barry, who is now the president of Fayette National Bank (FNB), about a loan using his inventory as collateral.

Since Kyle sells to the public, Barry has some reservations and tells Kyle that he will have to think about the risks and how he can protect the Bank should Kyle's venture not be fruitful. Barry explains that he has financed inventory for other merchants, having lost money on some loans, and needs to figure out a way to better protect his Bank's interests.

Being good friends, Barry confides in Kyle that Sarah, who owns a furniture store in nearby Winfield, borrowed $80,000 a couple of years ago from FNB, and granted a security interest to FNB on her present and after-acquired inventory. Sarah liked her employees and family and enjoyed making people happy, probably too much so.

Employees could select pieces of furniture and place it in their offices and even some employees, with Sarah's knowledge carried furniture home. One of Sarah's managers often took pieces of furniture home during special holidays or when she was expecting overnight guests. The understanding was that this furniture would be sold as floor models after a few months, but that rarely, if ever, happened. Most of the furniture has been in the employee offices or homes since shortly after the store opened.

Sarah also loaned several pieces of furniture to her family with the understanding that she can take the pieces back and sell them at any time. Now Sarah is in default on the debt to FNB and Barry is concerned that FNB may not be able to recover the furniture in employee homes, as well as those pieces in the homes of Sarah's family members.

As happens in many small towns, friendships influence business. Barry also confides in Kyle that a classmate of theirs, Ted is also in financial trouble. Ted is a retailer of auto parts and buys his inventory from Ole Miss, Inc., a parts manufacturer in a neighboring state. To finance his inventory, Ted buys the parts from Ole Miss on credit, signing a promissory note and giving Ole Miss a security interest in his inventory.

To Barry's knowledge and belief, Ole Miss perfects this security interest. However, Ted from time to time also needs cash for working capital, so Ted occasionally borrows money form FNB, giving FNB a security interest in the store's inventory. In a recent instance, FNB perfected this security interest before Ole Miss perfected its security interest. Now Ted cannot pay his debts, so both Ole Miss and FNB are in the process of attempting to foreclose on the collateral and Barry is worried that he may have made a bad business decision.

Kyle and Barry work out the details of their financial relationship and Kyle moves on to other projects. Kyle needs to replace some of the agricultural equipment, especially a large John Deere tractor and twelve row planter that he uses in the fields to grow his produce. He has approximately $150,000 in cash to put toward the purchase price for the tractor and planter, which is listed for $450,000.

Feeling that he has bargained too much with Barry, Kyle goes to Winfield Bank & Trust (WB&T) and borrows $250,000 for part of the purchase. Kyle buys the tractor and planter, using the cash from WB&T, the $150,000 in cash on hand, and by drawing $50,000 on a preexisting unsecured line of credit. Kyle and WB&T execute a security agreement on February 9 and Kyle acquired the tractor and planter on February 12. On April 1, Kyle went to Fayette County National Bank (FCNB) and signed an agreement to borrow $50,000 which would be used to pay back the line of credit used in the purchase of the equipment.

FCNB extended the credit to Kyle on April 3, and filed a valid financing statement on April 15. On April 10, Kyle went to Jasper Savings & Loan (JS&L) and borrowed $75,000 using the equipment as collateral. On the same day, WB&T properly filed a copy of the security agreement with Kyle. Unfortunately, an exceptional early spring drought and daily high winds have caused Kyle's farming operation to fall on hard times and now, he feels that he might default on his debts involving the tractor and planter.

While feeling the financial pinch and shaken by his bad fortunes, Kyle is visited by a life insurance salesperson, Slick Willy. Willy did an especially good job of selling, and Kyle decided to buy several policies, naming Alabama Sunshine as the beneficiary on each. In addition to a policy on himself, Kyle purchased one policy each on the life of his wife, his mother, his youngest son, his aunt, his uncle, and the elderly man who lives next door.

Kyle has been married for 12 years, which was shortly after he graduated from UNA. His mother is 62 years old and provides no support to Kyle. In fact, Kyle has very little contact with her as she lives in Tunica, MS, working at one of the riverboat casinos dealing blackjack and Kyle spends all of his time trying to make his business successful. His aunt provides no support now but did help when Kyle was young and his parents had difficulty making ends meet raising tobacco.

Kyle's father had hoped to get rich raising tobacco in Alabama but the venture only chewed up the family's savings and thrust them into hard times. Kyle does receive $10,000 each year as a gift from his uncle, but otherwise receives nothing from him. And, Kyle has known the elderly man next door for 11 years and often assists the old man when he needs help. Kyle knows that insurance is a gamble but feels that the money will be an investment and was well spent.

Having cooled off from the excitement of buying the insurance policies and feeling the reality of his financial dilemma, Kyle comes to you, his college confidant and counsel, for advice about his situation. Kyle knows that you are knowledgeable in the finer points of secured transactions, bankruptcy, and insurance and he trusts your guidance during troubling times and worrisome situations. He also wants you to offer him some advice that he can share with his buddy, Barry.

Note: To help you organize your thoughts read the fact set; decide which facts are relevant and which are merely verbiage; based on the information in Unit 3, decide which legal information is relevant to the facts; then state the relevant facts, state the relevant law, and apply the law to the facts, taking the issues one at a time.

WA3 has six or more main issues with possibly related issues. Be aware that the issues are difficult. There are no significant minor issues intended in WA3.

Number of Pages: 1 Page

Page Line Spacing: Double spaced (Default)