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Agile Corporation borrows $1 million from Hi Finance Company

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Agile Corporation borrows $1 million from Hi Finance Company (HFC). Agile signs a financing statement that describes the collateral, its inventory and proceeds, and HFC files the statement in the appropriate state office. Using the same collateral, Agile later borrows $500,000 from Metro Bank, which files its financing statement. Agile defaults on the loans. Metro claims that at the time of its loan it was unaware of HFCs interest. Between these parties, who has priority to the collateral? Discuss your answer. 200 words
Submitted: 5 years ago.
Category: Short Essay (2 pages or less)
Expert:  TeachHelp replied 5 years ago.

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In this case, the first party to file the financing statement has priority in the collateral. By filing the financing statement first, a party can perfect a security interest in the collateral. This makes the party a secured creditor, and protects that secured party’s interests of most creditors who would then acquire a security interest after the filing of the financing statement. The later creditor who acquired the security interest still has a valid claim against the collateral. However, this later creditor is a junior creditor, meaning that their security interest has a lower priority than the party who filed the first financing statement. In this way, it is still possible for the junior creditor to have some means of recovering their loss. If the collateral was foreclosed upon, the priority secured creditor (in this case HFC) would get their debt satisfied first. If there was anything left over, the junior secured creditor would receive payment as well. It does not matter that the later secured party did not have actual knowledge regarding the financing statement. By filing the first notice, the first secured party creates constructive knowledge for all future creditors. Therefore, in this case, Hi Finance Company (HFC), who properly filed a financing statement with the state, perfected their security interest in the collateral first. While Metro Bank does have a claim, (as they also perfected a security interest), it is a claim that is junior to that of HFC. As discussed earlier, it does not matter that Metro Bank had no actual knowledge; they are deemed to have constructive knowledge of HFC’s earlier financing statement.

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