Steve’s Shoes Inc. has entered into the following loan agreements: A. Borrowed $

Question

Steve’s Shoes Inc. has entered into the following loan agreements:

A. Borrowed $50,000 from Bank A to finance its start-up costs and working capital. A security agreement in connection with all inventory and after acquired equipment is executed in January, 2010 and a financing statement filed in March, 2010.

B. Borrowed $50,000 from Bank B to finance working capital. A security agreement in connection with inventory and after acquired equipment is executed and a financing statement filed in February, 2010.

C. Purchased $100,000 worth of shoes on credit from FEET, INC. A security agreement is signed in April, 2010.

D. Purchased $100,000 worth of machinery from MACH, INC. A security agreement is signed and a financing statement is filed in May, 2010 and copies are sent to Banks A and B.

Steve’s Shoes, Inc. files for bankruptcy. Assets available are $50,000 worth of shoes and $50,000 worth of machinery. The other $50,000 worth of machinery was sold to OSCAR’S SHOES, a competitor. How will the bankruptcy trustee distribute the available assets? Be specific and give legal reasons for your conclusions.

Explanation / Answer

The total liability of steve shoes inc. are:

a) bank A $ 50,000

b) Bank B $ 50,000

c) Creditor FEET INC $ 1,000,000

d) Mach Inc $ 50,000.

Since the banks have a charge on the assets on first hand therefore as per insolvency rule they shall be paid off first. The creditors have a security agreement so will be paid subsequent to the discharge of first charge.

So out of the total available resources of $ 150,000 first the payments to banks worth $ 100,000 would be made and then an equal payment of $ 25,000 each will be made to the creditors.

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