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Collateral for Bank

Mike is the sole shareholder of Cuteness Dog, Inc. ("CDI"). He is operating his company as a sub chapter S corporation. It is a small manufacturing company that produces a complete line of accessories for dogs such as collars, clothing, play toys, treats, etc. Many of the designs are unique and have been patented by CDI. In addition, CDI had its logo registered as a trademark.

CDI sells its product to several large retail chains such as Bullseye and Buymart on 30 day terms. Most of the raw materials for the production of the items come from small suppliers within 200 miles of the CDI plant. CDI buys all of its raw material on open account. The CDI plant is located on a 40 acre tract of property and consists of the main manufacturing building, a separate corporate office building, and a warehouse with loading dock. Mike inherited the real estate from his grandfather, and borrowed money from First National Bank (the "Bank") to build the CDI plant facility. Mike is leasing the factory, office building and warehouse to CDI. The real property has a conservative market value of $10,000,000.00. Mike currently owes the Bank $2,000,000.00. The Bank has the only mortgage on the property. The original debt to the Bank was $8,000,000.00

CDI delivers its own product using its tractor-trailer fleet. The trucks and trailers were purchased from Mad Dog Truck and Trailer Sales, Inc. on an installment sales contract and security agreement. The sales contract and security agreement were sold and assigned to Truck Finance America ("TFA"). TFA's lien is noted on all of the titles for the trucks and trailers. The truck fleet and trailers have a current market value of $4,500,000.00, and CDI owes TFA $1,500,000.00.

CDI wants to expand its market to cover the entire United States. In order to do that, it will need to obtain additional money to develop regional shipping facilities and expand its fleet. CDI goes to the Bank to borrow the money for the expansion.

I. Identify what items of collateral CDI can offer to the Bank. Identify by name or category all secured and unsecured credit or debt that CDI or Mike has now. If necessary, Mike would consider signing a guaranty and pledging collateral as well. What could Mike offer the Bank as collateral? Concentrate only on the questions asked. Do not worry about other factors such as sales, profit, loss, etc.

II. The Bank has agreed to loan the money to CDI for the expansion. Identify each item of collateral that the Bank can take, what steps are necessary for it to have a security interest in the collateral, and how is the security interest perfected. During this process, several of CDI's suppliers have decided that they do not want to sell to CDI on open account. What steps can they take to make sure that they get paid? If you are the bank officer, how would you structure the loan to protect the bank? Concentrate only on the questions asked. Do not worry about other factors such as sales, profit, loss, debt to equity ratio, etc.

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I. Identify what items of collateral CDI can offer to the Bank. Identify by name or category all secured and unsecured credit or debt that CDI or Mike has now. If necessary, Mike would consider signing a guaranty and pledging collateral as well. What could Mike offer the Bank as collateral? Concentrate only on the questions asked. Do not worry about other factors such as sales, profit, loss, etc.

The items that Mike can offer the Bank as collateral are the real estate to the extent of $8,000,000. The value of the real estate is $10,000,000, and Mike owes the Bank $2,000,000, so the bank has a mortgage of $2,000,000 on the real estate, so ($10M - $2M), Mike can offer the Bank real estate as collateral to the extent of $8,000,000. In addition, Mike can offer the Bank trucks and trailers to the extent of $3,000,000. The lien ...

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