CH 6 SECURED TRANSACTIONS # 2 1) How does a \"floating lien\" help a secured par

Question

CH 6 SECURED TRANSACTIONS # 2

1) How does a "floating lien" help a secured party's protection against debtor default?

2) Creditor (C) lends money to a debtor (D) to buy inventory and equipment for D's business and attaches and perfects a security interst in all of D's present equipment and inventory PLUS any "after acquired" equipment and inventory. Subsequently D wants to purchase more inventory and equipment from E on credit. Is there any way for E to have priority over ANY of D's equipment ot inventory?

Explanation / Answer

1) This "Floating lein" is commonly used for financing of inventories. A legal claim that is charged on a group of assets rather than on an individual asset is called Floating lein. A credit may change the piece of inventory if he is not interested and hence the lein floats may also change from one to another.

2) The below example illustrates this situation:

A person-M needs some loan to be used as working capital. On Dec 12, that person receives some amount in the form of loan through North bank by signing an agreement and also by keeping inventory as collateral.

On the very day, the Bank updates its financial statement and non-PMSI.

On the next month, Person goes to a manufacturer-P to buy some amount of inventory which is a form of bargain. Since this is bargain, the person do not pay any cash but keeps the agreement with the manufacturer-P as a form of security.

On the next month, the inventory was brought but due to unexpected fire accident, the inventory is mostly damaged.

Since the inventory left over is very less, the Person is unable to cover both the debt obligations.

Here, either the North bank or the Manufacturer should receive the remaining inventory.

If the manufacturer would have sent an agreement of the perfect filing before the accident took place to the North bank, then it would have an option to claim the remaining inventory. Since it did not proceed in that way, the remaining inventory would be claimed by the North Bank.

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