Talk To Me is a successful business whose consultants personally train very rich technophobes on how to use the latest technology. Six months ago Talk To Me got a line of credit from the Harvest Bank that allowed Talk To Me to draw up to $500,000 to pay for the acquisition of new staff and other expenses that Talk to Me anticipated would occur with the rush to train new users of the iPhone. This line of credit was secured by Talk To Me’s current and after-acquired equipment (valued at $1 million). Harvest duly filed a valid financing statement with the secretary of state on June 1st and Talk to Me drew on the line of credit for $200,000.

In the rush to hire new employees Talk to Me did not screen very carefully and hired Jack Bauer, an employee with a horrible driving record. While late for an appointment Jack drove through a mall severely wounding numerous people. The incident made the headlines for days and on September 1st a judge gave summary judgment to a lawsuit filed by the injured. On September 2nd Talk to Me withdrew $300,000 to pay for legal fees associated with the lawsuit. On September 15th the Sheriff enforced the judgment and took possession of Talk to Me’s equipment. On October 29th Talk To Me convinced Harvest Bank to issue it a loan in the amount of $500,000 for the express purpose of obtaining new equipment to carry on the business, this loan to be secured by the new equipment itself. Talk to Me never purchased the new equipment and declared bankruptcy on October 6.

If the equipment was sold for $1,000,000, how much of that would Harvest Bank be entitled to and why?

1) $500,000 (the full limit of the original line of credit).

2) $200,000 (the amount outstanding at the time the judgment was entered).

3) $1,000,000 (because Harvest Bank would have priority for its October 29 future advance).

4) $1,000,000 (Harvest Bank would have priority for the first $500,000 based on its original line of credit, and the second $500,000 based upon purchase money priority).