Two gentlemen walk into your CPA office and tell you that they wish to start a business. The facts as they relate them to you are as follows:

The two men are brothers named John and Bill Harris. John has developed a secret recipe for beer battered fried walleye nuggets. Bill has lots of money and is interested in starting a business with his brother but has no experience in the restaurant field and no interest in learning. Bill just wants to supply the money and eat nuggets.

John has decided to call the business The Tasty Nugget and has found a place recently vacated by another restaurant at Newport on the Levee. John is willing to do all the work including using his secret recipe, starting the business and running it so long as Bill supplies all the money. They have agreed to split any profits 60/40 in favor of John. They have also agreed that John will handle the day-to-day decisions but both brothers must agree upon all major decisions regarding the business. The brothers having taken a CPA Law course decided that they wish to create a LLC and you have sent them to a very competent attorney. An LLC was created using the name Tasty Nugget, LLC.

Question 2.

The Tasty Nugget is starting to get a cliental and as of July 31, 2017 was starting to show a small profit. Before any monies could be distributed the business hit a snag. Prior to the opening of the restaurant, Bill Harris loaned the business several thousand dollars for equipment and took a purchase money security interest in any equipment that was purchased with that money. John used the money to buy a stove from the now defunct restaurant The Bamboo Club for $500.00.

Bank One had loaned money to The Bamboo Club when it first opened in 2013. The purpose of the loan was to purchase equipment for The Bamboo Club including the stove that now is used to cook mouth-watering walleye nuggets at The Tasty Nugget. The loan to Bank One was never paid off and Bank One has a recorded security interest on the stove. Bank One has come to The Tasty Nugget and wants the stove turned over to them as they claim a superior interest in the collateral.

Bill is asking your opinion as to what you think he should do with the stove. Should he give it to Bank One or not? Explain the priority rules for conflicting security interest and how they apply to this situation. What advise do you give to Bill?