Situation #$1-$ Diamond Star is Collateral

Sandy Horsewoman owns a valuable horse named Diamond Star that she uses for competitive horse shows and also for breeding. Diamond Star is valued at about $$25,000.($Note: Under the UCC, animals are regarded as property.$)$ Sandy needs to borrow $$10,000$ from her brother$-$in$-$law and sister, Larry and Karen Relative. Karen, who also loves horses, says she and Dan will loan the $$10,000$ to Sandy but Sandy needs to leave Diamond Star with them until the loan is paid off. It is agreed Karen will be able to ride Diamond Star in horse shows. The agreement is totally verbal $-$ nothing in writing.

Is the above situation an example of a secured transaction? $\_\_\_\_($Yes$,$ it is a type of secured transaction called a pledge $/$ No$,$ since there was no signed security agreement this is not a legally recognized secured transaction$)$

Unfortunately, Sandy Horsewoman was not able to pay Larry and Karen back. Larry and Karen were not sure if they would just keep the horse and call it good or if they would sell Diamond Star. However, before Karen and Larry can sell Diamond Star or do other things to try and collect the money owed to them, they got a letter from Home Town Bank that informs them that Home Town Bank loaned Sandy money a couple of years earlier and filed something called a UCC financing statement with the Secretary of State's Office. Assuming Home Town Bank has filed a financing statement that properly lists Diamond Star as collateral for a loan made by Home Town Bank to Sandy, does Home Town Bank have a priority interest in Diamond Star $($and can sell the horse off to collect its debt from Sandy$)$ or do Karen and Larry have a priority interest in Diamond Star since they actually have possession of the horse? $\_\_\_\_\_($Home Town Bank will prevail since both it and Karen & Larry have perfected security interests in the horse but the bank perfected its interest first $/$ Karen and Larry will prevail since they actually have the horse in their possession and the law states possession is $9/10$ths the law$)$