Rick’s Cadillac (Rick’s) is a dealer of new and used Cadillacs. Rick’s purchases its new cars on credit from General Motors Corporation (GM), to whom it grants a security interest in "all of Debtor's inventory, including after acquired." Nick buys a brand new Escalade from Rick’s, which he pays for with a promissory note and by granting a Rick’s a security interest in the Escalade. Rick’s then sells the promissory note and the security interest to Automotive Factoring Solutions (AFS) in exchange for a cash payment equal to 90% of the face amount of the promissory note. AFS took possession of these documents, which did not indicate that GM claimed any interest in them. Shortly thereafter, Rick’s went into bankruptcy, as Cadillacs fell out of style in favor of Honda’s outstanding line of sedans.
As between GM and AFS, who has first priority in the right to payment due from Nick for payments due on the Escalade?
1. GM, because the right to payment is proceeds of goods in which it had a prior perfected security interest.
2. GM, because Rick’s did not have the right to sell this right to payment.
3. AFS, because AFS purchased the right to payment for value and in good faith in the ordinary course of its business
4. AFS, because its collateral description is more specific than GM’s.