On January 1, 2010, Bank extended a loan to James Franklin to start his new business as a seller of concrete shoes. Bank took a valid security interest in "all of Debtor's equipment and inventory, including after-acquired" and Bank perfected it by filing a UCC-1 covering the collateral that same day.
On April 1, 2010, Franklin entered into an agreement with Yost Credit Co. to supply him with the credit he needs to purchase the concrete shoes which he will sell to his customers. In exchange, Yost Credit takes a purchase-money security interest in Franklin’s inventory. Yost Credit does not file a financing statement.
On May 1, 2010, Franklin sells a pair of his shoes to Corbin Berkstresser, who signs an installment contract promising to pay for the shoes in 12 installments. Under the contract, Franklin retains title to the shoes until Berkstresser makes all 12 installment payments. Franklin then proceeds to sell the contract (which makes no mention on its face that either Yost or Bank has any interest in it) to Pinkel Financing (a loan servicing company) who takes possession of the contract and pays Franklin $1000 cash. Who has priority over the installment contract?
1. Yost Credit, because it had an automatically perfected, first-priority purchase money security interest in the shoes, and thus had a first-priority security interest in the contract as proceeds of the shoes.
2. Pinkel Financing, but only if Pinkel Financing is unaware that Yost and Bank has a security interest in the contract as proceeds.
3. Bank, because it has a perfected security interest in the contract as proceeds of inventory, and has priority under the first-to-file-or-perfect rule.
4. Pinkel Financing, even if it is aware that Yost and Bank have a security interest in the contract as proceeds of inventory.