Agile Corporation borrows $1 million from Hi Finance Company (HFC). Agile signs a financing statement that describes the collateral, its inventory and proceeds, and HFC files the statement in the appropriate state office. Using the same collateral, Agile later borrows $500,000 from Metro Bank, which files its financing statement. Agile defaults on the loans. Metro claims that at the time of its loan it was unaware of HFCs interest. Between these parties, who has priority to the collateral? Discuss your answer.
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In this scenario it is clear Agile Corp. has committed loan fraud against Metro Bank. Regardless of their knowledge of the first loan, Metro Bank is a silent second and maintains the junior loan to HFC. When structuring a loan the first lender is known as the senior loan. Subsequent loans are referred to as junior loans and are most often tiered according to when they were granted. The second loan maintains the second lien and so on. Given the facts of this case because HFC acted in good faith on the original loan, they will maintain the senior loan and have the first lien on the property.
All is not so well for the operators of Agile Corp. Metro Bank can retrieve their loan payment in one of two ways or a combination of them. First, should the inventory and proceeds cover their loan after HFC has recouped their loss, then Metro Bank is monetarily satisfied. This is highly unlikely, otherwise Agile Corp. would not have defaulted in the first place. Secondly, Metro Bank can work with the local US Attorney's Office and ask for restitution via a criminal conviction of the governing board of Agile Corp. Restitution is a sentence mandate to repay monies to an injured party.
Agile Corp. has committed numerous federal felony violations including 18 US 1341 (Frauds and Swindles), 18 US 1344 (Bank Fraud) and 18 US 1001 (False Statements). In general these fraud statutes deal with whoever invents or engages in a fraudulent manner to misappropriate monies from a financial institution. By failing to notify Metro Bank of the senior loan, Agile Corp. mislead them on the security of the collateral property. A conviction for any of the above stated laws can include as part of the sentence restitution for monetary loss not covered by the junior lien.