Question

First Bank loaned $400,000 to Thomas, taking a security interest in his yacht. Thomas defaulted on the loan and First Bank repossessed the boat. First Bank sold the yacht at a public sale. The sale yielded $50,000 more than the debt. First Bank ______.

Answer 1

First Bank repossessed Thomas's yacht after he defaulted on a $400,000 loan and sold it, acquiring $50,000 more than the debt. They must return the surplus to Thomas, reflecting standard practice in secured loans, where any excess must be returned to the borrower.

Step-by-step explanation:

When First Bank loaned $400,000 to Thomas and took a security interest in his yacht, and then sold it after he defaulted, it engaged in a process that's standard for secured loans. Similar to a scenario where Singleton Bank lends money to Hank's Auto Supply, loans are treated as assets that generate interest income. In case of default, the lending institution has the right to repossess and sell the collateral (like the yacht in this case) to recover the debt. If the sale of collateral yields more than the outstanding debt, as in the scenario with Thomas where the sale yielded $50,000 more than the debt, the bank must return the surplus to the borrower after satisfying the loan amount and any associated costs of the repossession and sale process. This practice ensures that while lenders can recover the amount they're owed, borrowers are not disproportionately stripped of their assets beyond the loan value.