Sample Question 3

Arcade, Inc. is in the business of selling pinball machines. Arcade needed funds to buy furniture for its showroom. On February 1, Arcade borrowed $10,000 from Bank and signed a valid financing statement, which stated that it covered all of Arcade's "inventory now owned or hereafter acquired." Bank neglected to obtain a signed security agreement from Arcade but properly filed the financing statement in the correct locations on February 12.

On June 1, Arcade borrowed $40,000 for working capital from Finance and signed a valid security agreement granting to Finance a security interest in its "inventory now owned or hereafter acquired." Also on June 1, Arcade signed financing statements, which properly described the collateral. On June 5, Finance filed proper financing statements in the correct locations.

On July 1, Bank realized that it had failed to obtain a security agreement from Arcade. On that date and at Bank's request, Arcade signed a valid security agreement, properly describing the collateral as "inventory now owned or hereafter acquired."

On August 20, Arcade purchased three pinball machines from Supplier on credit. The three machines were set aside in Supplier's warehouse and tagged "Sold to Arcade." Supplier took a security interest in the three pinball machines to secure payment of the purchase price. Also on August 20, Arcade signed both a valid security agreement covering the three pinball machines and valid financing statements. Supplier filed the financing statements in the correct locations on August 21 and sent proper notice of its security interest to Bank and Finance, both of whom received and read the notice by August 25. Arcade took possession of the machines on August 31 and placed them in its showroom for sale to customers.

On October 1, Oscar purchased a pinball machine from Arcade. This machine was one of the three machines that Arcade had purchased from Supplier. Oscar had no actual knowledge of any of the security interests held by Arcade's creditors.

Arcade defaulted on its loans to Bank and Finance and failed to pay Supplier. At the time of the default, Arcade's inventory consisted only of the two remaining pinball machines that had been previously purchased from Supplier. Bank, Finance, and Supplier are all claiming security interests in the two remaining pinball machines, as well as in the pinball machine purchased by Oscar.

1. What is the order of priority among Bank, Finance, and Supplier in their respective claims to a security interest in the two remaining pinball machines left in Arcade's inventory? Explain.

2. Can Bank, Finance, or Supplier successfully enforce a security interest in the pinball machine purchased by Oscar? Explain.