Debtor obtained a $50,000 line of credit from First Bank to finance the purchase of equipment for its lawn care business and operating costs. The Debtor purchased lawn mowers and leaf blowers. The Debtor signed a security agreement that covered “all of Debtor’s equipment, accounts, and inventory, including after-acquired.” First Bank properly filed a UCC-1 covering the collateral.
Debtor ran into issues when several of its monthly customers failed to pay significant bills they owed Debtor for its services (two large customers went bankrupt). Debtor also incurred extra repair expenses on its offices. Because Debtor needed to buy fuel to run the mowers for its extra jobs (to cover losses), Debtor went to Second Bank and asked for a cash advance of $5,000. Second Bank loaned Debtor the money, but only after Debtor executed a security agreement covering the fuel to be purchased. A month later Debtor, none of the extra jobs occurred as planned and the Debtor is bankrupt.
Who has priority to the fuel that was purchased with the money loaned from Second Bank?
1. Second Bank has purchase money priority over First Bank by virtue of its automatically perfected purchase money security interest in the fuel.
2. First Bank's perfected security interest in the fuel has priority over Second Bank's unperfected security interest in the fuel.
3. Second Bank has purchase money priority because its loan was for the full price of the fuel.
4. First Bank's perfected security interest in the fuel has priority over Second Bank's perfected security interest in the fuel.