Question

Winslow Co., which is in the business of selling furniture, borrowed $60,000 from Pine Bank. Winslow executed a promissory note for that amount and used all of its accounts receivable as collateral for the loan. Winslow executed a security agreement that described the collateral. Winslow did not file a financing statement. Which of the following statements best describes this transaction?

1) The transaction is not valid because Winslow did not file a financing statement.
2) The transaction is valid because Winslow executed a security agreement.
3) The transaction is not valid because Winslow did not use any other assets as collateral.
4) The transaction is valid because Winslow borrowed money from Pine Bank.

Answer 1

The transaction between Winslow Co. and Pine Bank is valid due to the executed security agreement, which sets the lender's claim on the collateral, despite the lack of a filed financing statement. The correct option is B.

Step-by-step explanation:

The transaction between Winslow Co. and Pine Bank is valid because a security agreement, which details the collateral, has been executed between the parties. In financial transactions, a security agreement coupled with a promissory note can establish a secured transaction even without the filing of a financing statement. However, the lack of a filed financing statement may affect the priority of the lender's interest in the collateral in the event that Winslow defaults and other creditors are involved.

It's important to remember that filing a financing statement publicly discloses the secured interest and can serve to perfect the security interest, making it superior to the claims of subsequent creditors. But this does not make the initial security agreement invalid between Winslow and Pine Bank. The bank, by requiring collateral and executing a security agreement with Winslow, has taken steps to ensure that if Winslow does not repay the loan, the bank has a right to seize and sell the accounts receivable to recover the debt.