The Equipment, the Inventory, and the Late Notice

Question 80: The Equipment, the Inventory, and the Late Notice

Your role

You represent Precision Robotics, a purchase-money seller, in a priority dispute with Atlas Bank after their common debtor defaults. Apply the supplied perfection and super-priority rules, allocate the collateral proceeds, and state what Precision wins and loses.

Governing law

Assume the following secured-transactions rules apply:

1. A security interest attaches when value is given, the debtor has rights in the collateral, and an authenticated security agreement describes the collateral.

2. Between conflicting perfected security interests, priority ordinarily goes to the party that first filed or perfected.

3. A purchase-money security interest in equipment has priority over an earlier blanket lien if the purchase-money creditor perfects no later than 20 calendar days after the debtor receives possession of the equipment.

4. A purchase-money security interest in inventory has priority over an earlier inventory lien only if, before the debtor receives the inventory, the purchase-money creditor both perfects and sends an authenticated notice to the holder of the conflicting filed inventory lien.

5. A late inventory notice does not relate back for inventory already received. It may satisfy the notice condition for later shipments while the notice remains effective.

6. Purchase-money priority extends only to the unpaid purchase-money obligation and identifiable proceeds to the extent the applicable super-priority rule covers those proceeds.

7. When a debtor sells inventory, identifiable cash proceeds are the amount traceable under the lowest-intermediate-balance method supplied in the facts.

8. A senior creditor receives collateral value only up to its outstanding secured debt. Any surplus passes to the next-priority creditor.

9. Filing before attachment is permitted and establishes the filing date once the security interest attaches.

10. A down payment reduces the purchase-money obligation but does not defeat purchase-money status for the financed balance.

Facts

On January 3, 2025, Atlas Bank filed a valid financing statement covering all present and future equipment, inventory, and proceeds of ForgeSpan Manufacturing. Atlas later advanced funds under a valid security agreement. At default, ForgeSpan owes Atlas $1,800,000.

CNC equipment

Precision sold ForgeSpan a CNC production line for $900,000. ForgeSpan paid $200,000 down and Precision financed $700,000 under an authenticated equipment security agreement.

ForgeSpan received possession on May 2, 2026. Precision filed a valid equipment financing statement on May 21, 2026. At default, the unpaid equipment obligation is $620,000. The CNC line produces $650,000 at foreclosure.

Resale inventory

Precision also sold ForgeSpan 40 robotic welding units for resale for $1,200,000, all financed under an authenticated inventory security agreement.

Precision filed against the inventory on June 9, 2026. ForgeSpan received all 40 units on June 10. Precision emailed authenticated purchase-money notice to Atlas on June 11. Atlas received it that day.

Before default, ForgeSpan sold 10 units. The lowest-intermediate-balance calculation identifies $260,000 in remaining cash proceeds from those sales. The 30 remaining units produce $750,000 at foreclosure. At default, the unpaid inventory obligation to Precision is $900,000.

No later inventory shipment occurred after Atlas received the June 11 notice. All filings and collateral descriptions are otherwise valid. Neither creditor has another special priority, and no costs of sale are deducted in this assignment.

Precision argues that filing before inventory receipt should be enough and that the June 11 notice should relate back one day. Atlas argues that its January 2025 blanket filing defeats every Precision interest.

Assignment

Analyze and calculate:

• Attachment and perfection of each Precision security interest.
• The 20-day equipment period from May 2 to May 21.
• Priority in the CNC line and allocation of its $650,000 proceeds.
• The separate pre-receipt requirements for inventory super-priority.
• The effect of the June 11 notice and whether it relates back.
• Priority in the 30 remaining inventory units.
• Priority in the $260,000 identifiable cash proceeds.
• Total dollars each creditor receives from the supplied collateral.
• Remaining secured or unsecured balances after allocation.
• Precision's concrete litigation position and the change needed for future inventory shipments.

Q80 key (Purchase-Money Priority Fight)

1. Both Precision interests attached through value, debtor rights, and authenticated descriptions. Precision perfected equipment on May 21 and inventory on June 9; filing before inventory attachment is permitted. Missed: a valid interest is denied because one filing preceded receipt.
2. The equipment filing was within 20 calendar days after May 2 possession. May 21 is day 19 after the receipt date, so Precision's equipment purchase-money security interest has super-priority over Atlas up to the $620,000 unpaid purchase-money debt. Missed: Atlas's earlier blanket filing is treated as absolute or the grace period is miscounted.
3. Allocate the $650,000 CNC proceeds: Precision receives $620,000 and Atlas receives the $30,000 surplus. Precision's equipment debt is paid in full. Missed: Precision claims the down payment or Atlas receives value ahead of the timely purchase-money interest.
4. Inventory super-priority fails because both perfection and authenticated notice had to occur before June 10 receipt. Filing on June 9 satisfies one condition; notice received June 11 fails the other and does not relate back. Missed: the two inventory conditions are collapsed or late notice is cured retroactively.
5. Atlas therefore has first priority in the 30 remaining units and the $260,000 identifiable proceeds under its January filing. The June 11 notice could protect later shipments, but none occurred. Missed: Precision claims proceeds through a super-priority it never obtained.
6. Collateral allocation: Atlas receives $30,000 equipment surplus + $750,000 inventory + $260,000 cash, totaling $1,040,000. Its secured debt falls from $1,800,000 to $760,000. Precision receives $620,000 on equipment, leaving no equipment balance, and receives nothing on its $900,000 inventory debt, which is unsecured as against this collateral. Missed: total proceeds or remaining balances do not reconcile.
7. Litigate for the equipment proceeds and concede Atlas's priority in existing inventory and proceeds while preserving any contract claim against ForgeSpan. For future inventory, file and deliver authenticated notice to every conflicting filed inventory lender before the debtor receives goods. Missed: overclaiming the lost inventory position jeopardizes the fully winning equipment position or repeats the notice failure.