American Bank took a security interest in all of the inventory of Widgets-R-Us to secure a $500,000 line of credit. American Bank filed a financing statement listing only "inventory" as collateral. As part of their "widgets, widgets, and more widgets" promotional sale, Widgets-R-Us has been offering the option of a 12 month, low-interest installment plan for customers to pay off their widget purchase. As part of this installment plan, however, Widgets-R-Us retains title to all widgets sold until they are paid off.

On August 1, Kathy Kustomer needs 1000 widgets and takes the installment option, signing a 12-month, $100,000 contract.
On August 15, due to the merger of Widgets-R-Us’ two biggest competitors, Widgets, Inc. and The Widget Company, Widgets-R-Us’ sales decrease drastically. Having expended their full line of credit from American Bank, Widgets-R-Us is now in dire times and in need of additional resources just to keep their widget machines cranking. Widgets-R-Us sells Kustomer's contract to County Bank of Boone, which buys it for $90,000 and takes possession of the contract. Widgets-R-Us never tells County Bank of Boone about the agreement with American Bank (which is not indicated on the contract), although County Bank knows that Widgets-R-Us does business with American Bank and has heard about the line of credit, thus, they have a reasonable belief that American Bank could have interest in the contract.

Which of the following statements is correct?

1) County Bank of Boone has priority with respect to the contract because American Bank only had interest in the inventory, not the contract.

2) County Bank of Boone has priority as a purchaser of chattel paper.

3) American Bank has priority as first to file or perfect.

4) American Bank has priority because County Bank had knowledge that the purchase violated American Bank’s rights