X is about to fulfill her lifelong dream of opening a bakery. After finishing her training as pastry chef, X cannot afford to open the shop herself. Her parents offer to lend her $5,000.00 to get her started. X thanks them for their generosity. Concerned that X might think the money is a gift, X’s parents send her an email reminding her that the money is a loan and that by accepting the check, she is agreeing to grant them a security interest “all of the bakery’s inventory and equipment.”
X never responds to the email. When the check comes in the mail, X deposits the money in her checking account and writes a check drawn on that account to pay a security deposit and rent payment for a small commercial space on the town’s main street. To buy the ovens, mixers, pans, a cash register and all of the ingredients necessary to start baking, X takes out a small business loan from Local Bank for $30,000.00. She signs a security agreement granting Local Bank a security interest in, “all of the bakery’s equipment and inventory, now owned or after-acquired.” Local Bank properly perfects its security interest by filing a financing statement that same day.
Unfortunately, X runs out of money and has no way to deliver the beautiful cakes that the local townspeople have already started ordering. Her brother, Y, comes to the rescue and offers to sell X an old van he isn’t using for $2,400, payable in 24 monthly installments of $100.00 each, but only if X will grant him a security interest in the van until it is paid off. Y formalizes the agreement in writing; X signs the agreement, and on the same date Y takes the steps necessary to perfect the security interest.
Although X makes delicious cakes, she knows nothing about running a business. She undervalues her baked goods and cannot afford to pay another employee or bake enough cakes to meet the demand. The business fails and X is unable to make a single payment to anyone. As between Local Bank, X's parents, and Y, which statement is correct regarding their respective interests in the van?
A. All three creditors have a valid security interest in the van; Local Bank has first priority, Y has second priority, and X’s parents have third priority.
B. All three creditors have a valid security interest in the van; Y has priority, Local Bank has second priority, and X’s parents have third priority.
C. Only Y and Local Bank have a valid security interest in the van; Local Bank has first priority and Y has second priority.
D. Only Y and Local Bank have a valid security interest in the van; Y has first priority and Local Bank has second priority.