Devon Lee Incorporated is a Washington State business selling new and used pianos. On January 1, 2020 Devon borrowed $100,000 working capital loan from Bank of America. To secure the obligation to repay the loan, Devon signed an agreement granting Bank of America a security interest in “all the inventory and accounts of Devon Lee Incorporated, whether now owned or later acquired.”
On February 1, 2020 Bank of America filed a financing statement in the appropriate state office. The financing statement listed Mr. Devon Lee as the debtor and Bank of America as the creditor and identified “all personal property” as the collateral.
Shortly after Devon Lee Incorporated borrowed the $100,000 from Bank of America, Devon Lee Incorporated entered the following transactions:
On February 10, 2020 Devon Lee Incorporated sold a new piano to Charles Batten, a consumer. The sale occurred in Mr. Batten’s home. Mr. Batten paid slightly under fair market value for the piano. Devon Lee Incorporated gave Mr. Batten an appreciable discount because cash paid for the piano. At no point during this transaction was Mr. Charles Batten aware of the financial relationship between Devon Lee Incorporated and Bank of America.
On March 1, 2020 Devon Lee Incorporated traded Barbara Jones, a used piano for bedroom furniture and framed art. Devon Lee Incorporated immediately displayed the framed art in the store, but never offered the art for sale. The sole shareholder of Devon Lee Incorporated took the bedroom furniture home.
On March 5, 2020 Devon Lee Incorporated purchased an antique grand piano from Slater Restoration, a seller of restored pianos. The sale was on credit, with Slater providing the credit. Payment was due in 30 days. Devon and Slater signed a written agreement stating, in part, that Slater retained a security interest in the piano until the purchase price was paid in full. Slater never filed a financing statement.
It is now May 1, 2020 and Devon Lee Incorporated has defaulted on its payment obligation to Bank of America. Also, Devon Lee Incorporated has not paid Slater Restoration for the antique piano, which is still on display in Devon Lee Incorporated’s store.
Bank of America claims it has a secured interest in the Charles Batten piano, the bedroom furniture, framed art, and antique grand piano.
Charles Batten and Barbara Jones claim their pianos have been paid for in total and they own those piano’s free and clear. Slater Restoration claims the antique piano is collateral for the unpaid balance owed by Devon Lee Incorporated because the sale was a purchase money security interest (PMSI). General unsecured creditors of Devon Lee Incorporated claim all the inventory and accounts receivable should be distributed to unsecured creditors, resulting in Bank of America getting cents on every dollar loaned.
Devon Lee Incorporated Balance Sheet at May 1, 2020:
|
Assets |
Liabilities |
||
|
Cash |
$ 15,000 |
Bank of American Loan |
$ 100,000 |
|
Accounts Receivable |
30,000 |
Slater Restoration Payable |
15,000 |
|
Inventory – New Pianos |
45,000 |
Unsecured Creditors |
28,000 |
|
Inventory – Slater Grand |
18,000 |
Total Liabilities |
$ 143,000 |
|
Barbara Jones Art |
2,000 |
Shareholders’ Equity |
(33,000) |
|
Total Assets |
$ 110,000 |
Total Liabilities & Shareholders’ Equity |
$ 110,000 |
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