Contractor Supply, Inc. (Company) is a company located in Iowa. Bank holds a perfected security interest in all of Company’s inventory and after acquired inventory as of July 1.

On July 10 of the same year, Furniture Incorporated sold new inventory to Company and made arrangements to have the inventory delivered to Company on August 1. To pay for the new inventory, Company borrowed money from Credit Union and immediately used it to pay Furniture Incorporated. Company also immediately granted Credit Union a security interest in the new inventory that Company had purchased with the loan proceeds. Credit Union’s security interest attached to the inventory.

At the time Credit Union’s security interest in the inventory arose, Credit Union knew of the Bank’s prior interest. Credit Union's vice-president asks you on July 10 whether there is there anything Credit Union can do to have its security interest in Company's inventory take priority over the Bank's?

Question

Contractor Supply, Inc. (Company) is a company located in Iowa. Bank holds a perfected security interest in all of Company’s inventory and after acquired inventory as of July 1.

On July 10 of the same year, Furniture Incorporated sold new inventory to Company and made arrangements to have the inventory delivered to Company on August 1. To pay for the new inventory, Company borrowed money from Credit Union and immediately used it to pay Furniture Incorporated. Company also immediately granted Credit Union a security interest in the new inventory that Company had purchased with the loan proceeds. Credit Union’s security interest attached to the inventory.

At the time Credit Union’s security interest in the inventory arose, Credit Union knew of the Bank’s prior interest. Credit Union's vice-president asks you on July 10 whether there is there anything Credit Union can do to have its security interest in Company's inventory take priority over the Bank's?

BlackTom AI · Accepted Answer

Let’s walk through the priority rules step by step and examine each answer choice in light of the facts.
Option A: No, Credit Union did not receive a security interest in Company’s inventory until after the Bank received its security interest.
- The critical question is not when the security interest “is received” in a vacuum, but when it attaches and whether it is perfected with PMSI rules in play. The Bank has a perfected security interest in all inventory and after-acquired inventory as of July 1. Credit Union, by advancing money to purchase new inventory and taking a security interest in that inventory, creates a potential purchase-money security interest (PMSI) in the new inventory. The mere fact that the Bank’s prior interest exists does not automatically grant Bank superpriority over a later PMSI if the PMSI is properly perfected within the applicable time frame. Therefore, stating outright that Credit Union cannot take priority just because Bank was first is incorrect. This option oversimplifies priority and ignores PMSI perfection timing and notice requirements.

Option B: Yes, the Credit Union can file a financing statement to perfect its security interest in the inventory on or before the date it is delivered to Office Supply, Inc. Credit Union will also need to send an authenticated notification to Bank describing the inventory by the same time.
- This option aligns with the UCC treatment of a PMSI in inventory. If Credit Union files a financing statement (perfection) and, importantly, provides authenticated notice to the Bank describing the inventory, it can achieve superpriority over the Bank’s prior security interest if the timing requirements are met. The key points are: (1) the PMSI in inventory must be perfected, and (2) the secured party must notify the existing secured party of the lien. Doing so within the window before delivery (or at the precise moment of delivery) preserves priority, provided the 20-day rule for inventory PMSIs (where applicable) is satisfied and the notice is proper. The fact pattern supports the conclusion that timely filing and notice can give Credit Union priority over the Bank.

Option C: Yes, Credit Union can take priority over the Bank if Credit Union files a financing statement to perfect its interest in the inventory within 20 days of Office Supply, Inc.'s receipt of the inventory.
- This option rightly emphasizes the 20-day rule that often governs inventory PMSIs for achieving superpriority. However, there is a potential misfit with the timeline in the fact pattern: the inventory was delivered to Company on August 1, and the loan and security agreement were executed on July 10, with delivery to be completed August 1. The option’s reference to “Office Supply, Inc.’s receipt” is inconsistent with the facts (the inventory is being supplied to Company, not Office Supply, Inc.). If we assume the intended timeline is that the PMSI must be perfected within 20 days after possession, the core idea is correct, but the misalignment in the named party (Office Supply, Inc.) and the delivery timeline creates ambiguity. Because the question’s correct answer (as provided) does not hinge on this misnamed recipient, this option is conceptually plausible but improperly framed for the given facts.

Option D: No, the Bank filed and perfected its security interest in the inventory first.
- This statement would be true if no PMSI perfection or notice occurred, and if the Bank’s interest remained superior by priority rules. But the existence of a properly perfected PMSI in inventory with timely filing and notice can outrank a prior perfected security interest in inventory under the PMSI priority rules. Since the facts contemplate Credit Union taking timely action to perfect and notify, this blanket denial ignores the possibility of PMSI superpriority. Therefore, this option is incorrect given the opportunity for Credit Union to achieve priority through proper perfection and notice.

In summary, the correct approach is that Credit Union can achieve priority over the Bank if it perfects its purchase-money security interest in the new inventory (via a financing statement) on or before delivery and provides authenticated notice to the Bank describing the inventory. The other options fail to account for PMSI-based priority, misstate timing, or incorrectly assert perpetual inferiority without considering proper perfection and notice requirements.

ACCT:4300:0001 Fall25 Examination #2 - Accounting Ethics and Law- Requires Respondus LockDown Browser

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