Question

Darrel, Smith, Keith and Aaron are claimants to a collateral interest. All four have secured their interests on the collateral. Aaron takes physical possession of the collateral. Keith files a financing statement some time later. Who among the four would have highest priority of claim to the collateral?

Answer 1

The correct answer is letter "D": Aaron.

Step-by-step explanation:

In front of company bankruptcy, stakeholders can file claims to try to recover part of their investments. Under such scenarios, investors who had taken possession of physical assets have the priority moreover when they have documents explaining why they had already taken over those properties which could be furniture, tools, or vehicles. Unsecured claims will have lower priority in the recovery process.

Answer 2

Aaron

Step-by-step explanation:

Aaron holds possessory collateral since he took actual physical possession of the collateral in dispute. The Uniform Commercial Code (UCC) states that possession of a collateral perfects a lien over the collateral.

In less complicated words, since Aaron took possession of the collateral, his lien (claim) is the first one that must be paid if the collateral is executed (sold and proceeds divided among creditors). So at least his claim should be theoretically covered by the collateral itself. The rest of the creditors have to wait in line.