On June 15, Harper purchased equipment for $100,000 from Imperial Corp. and signed for the goods as President of the company. He also signed his name below the line as an individual. The goods were to be used in its manufacturing process. Harper paid for the equipment with funds borrowed from Eastern Bank. Harper gave Eastern an authenticated security agreement covering Harper's existing and after-acquired equipment. One June 21, Harper was petitioned involuntarily into bankruptcy under chapter 7. A bankruptcy trustee was appointed. On June 23, Eastern duly filed a sufficient financing statement . Which of the parties will have a superior security interest in the equipment and why? Can Harper be held liable personally for the goods?

Full question:

On June 15, Harper purchased equipment for $100,000 from Imperial Corp. for use in its manufacturing process. Harper paid for the equipment with funds borrowed from Eastern Bank. Harper gave Eastern a security agreement and financing statement covering Harper’s existing and after-acquired equipment. On June 21, Harper was petitioned involuntarily into bankruptcy under Chapter 7 of the Federal Bankruptcy Code. A bankruptcy trustee was appointed. On June 23, Eastern filed the financing statement. Which of the parties will have a superior security interest in the equipment?

A. The trustee in bankruptcy, because the filing of the financing statement after the commencement of the bankruptcy case would be deemed a preferential transfer.

B. The trustee in bankruptcy, because the trustee became a lien creditor before Eastern perfected its security interest.

C. Eastern, because it had a perfected purchase money security interest without having to file a financing statement.

D. Eastern, because it perfected its security interest within the permissible time limits.

Eastern parties will have a superior security interest in the equipment because it perfected its security interest within the permissible time limits.

Explanation:

Eastern has a higher security interest because Eastern amended its security interest inside the allowable time deadlines. A perfected security interest in any security interest in an asset that cannot be demanded by any other party.  

Below the Uniform Commercial Code (U.C.C.), to perfect a security interest, a lender has 10 days from the date of the sale of material to perfect the security interest by filing a financing statement.  Possessing registered in the 10-day limit, Eastern has a strong perfected security interest in the material and after-acquired things even though the bankruptcy was recorded two days ahead.

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