Mitch runs a bakery ("Mitch's Donuts) out of his home, which is located in a residential neighborhood. One afternoon, Mitch’s neighbor negligently tosses his cigarette butt into the dumpster outside Mitch’s home, which is filled with dry ingredients. The cigarette lands on some cardboard boxes and ignites, and the resulting firm burned down a significant portion of Mitch’s home. Since his customers generally don’t prefer burnt donuts, Mitch foresees that his bakery business might take a financial hit as well. So, Mitch decides to take out a loan just in case. Citizens Bank loans Mitch $10,000; Mitch executed a valid security agreement which granted a security interest in “all inventory, equipment, and all tort claims arising out of the burning of debtor’s business.” Citizens Bank filed a financing statement in the appropriate office covering these items of collateral. At the time of the execution of the security agreement, Mitch’s attorney had already filed a lawsuit on Mitch’s behalf seeking damages from his neighbor as a result of the neighbor's negligence.

After returning from Citizens Bank, Mitch began going through the remnants of his house. He tries to salvage his commercial oven but it is covered in black ash. Luckily, the oven was insured, so Mitch's insurer replaced it with a new one. All of the boxes of flour Mitch had prior to the fire are ruined. Mitch bought more flour, and resumed making donuts, but ultimately the attorney’s fees and costs he was having to spend prosecuting his tort claim became too much and Mitch defaulted on his loan.

Which of the following is correct?

1. Citizens Bank can repossess all of the flour, the new oven, and any funds Mitch receives as an award or settlement for the tort claim.

2. Citizens Bank can repossess all of the flour and any funds Mitch receives as an award or settlement for the tort claim, but not the new oven (as the security agreement does not have an after-acquired property clause)

3. Citizens Bank can repossess only funds Mitch receives as an award or settlement for the tort claim, not the flour or the new oven.

4. Citizens Bank has no valid security interest in the flour, the new oven, or any funds Mitch receives as an award or settlement for the tort claim..