Debtor takes out a loan to buy equipment for his business, and executes a security agreement with First Bank, with the collateral being described as “all of debtor’s equipment, including after acquired.” The loan is for $100,000 and is to be repaid in 12 monthly installments. First Bank files a UCC-1 to perfect its security interest on January 1, 2012. Debtor is a bit of an entrepreneur and believes that if he is able to secure an additional $50,000 he will be able to hire some temporary employees, rent extra equipment, and take on several new contracts that have become available. These contracts will be lucrative for Debtor so he wants to seize on the opportunity. However, Debtor knows the maximum First Bank was willing to lend him is the amount he received.
Debtor goes to Second Bank, and asks for the $50,000 loan, to be covered by the same collateral. Second Bank is not sure if it should loan the money to Debtor, even though his income prospects from his accounts seems strong.
Which statement is correct?
1. Second Bank can go ahead and make the loan, and as long as it perfects its agreement, it will share priority with First Bank if the debtor does not make his payments.
2. Because Second Bank knows about First Bank's security interest, that knowledge will automatically invalidate a security interest in the same collateral.
3. Second Bank should not make the loan, because there is no possible way Second Bank can execute this loan without First Bank having priority in debtor’s equipment.
4. Second Bank can loan Debtor an additional $100,000 to pay off First Bank, require First Bank to file a termination statement, and have full priority in the collateral.
5. Second Bank can get a statement of accounting under Section 9-210 and can thus limit First Bank's priority in the equipment to the current $100,000 outstanding to First Bank.