Question

1. Ahmed Bank &Trust issued several loans to Orlando Timberland so that Orlando could purchase timber from various landowners. Orlando gave the bank a security interest in the purchased timber, and the proceeds from the sale of the timber were intended to repay the loans the bank had made to Orlando. The bank intending to perfect its security interest filed a financing statements with the New Jersey secretary of state’s office. However, when Orlando sold the timber to various lumber mills with which it did business, Orlando failed to remit the sales proceeds to the bank. The bank filed suit against these purchasers, alleging that the purchasers had negligently entered into contracts with Orlando for the purchase of the timber and failed to exercise good faith. The bank further contended that the purchasers had been negligent in failing to request a lien search of UCC records with the New Jersey secretary of state. Had the purchasers conducted a lien search, they would have discovered the bank’s financing statement and security agreement. How would you decide this case? Do businesses have a duty to conduct lien searches with respect to firms from which they purchase goods. Assuming that the bank was successful would it have made a difference if the bank failed to file a ucc financing statement.

Answer 1

Let us understand the issue one by one:

1. As Ahmed Bank and trust filed the financial statement with the New Jersey secretary of state’s office, the same become the public document and anyone can view the financial statement of the bank from the website.

2. Doctrine of Indoor Management : It is the General principle of the Corporate law that the outside has no knowledge about the affairs of the Company or the indoor Management. But at the same time it is duty of the buyer to be aware.

3. As the Bank contended that the purchasers had negligently entered into contracts with Orlando for the purchase of the timber and failed to exercise good faith, in such the the bank can file the suit against both the buyer and the seller.

DIFFERENCE IF THE BANK FAILED TO FILE A UCC FINANCING STATEMENT

In this case the bank financial statement is not in the public domain so the outsider cannot have the knowledge of the security interest. Therefore the bank suit against the buyer will be dismissed by the court. In this case the bank can only claim the amount from Orlando Timberland  (" The Seller"). The Bank will be considered as the unsecured creditor.

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