21 COMPETITIONS FOR COLLATERAL - Lien Creditors Against Secured Creditors: Future Advances

Question 1

What is the general rule that applies to future advances? The exceptions?

Answer 1

UCC § 9-323(b) gives advances priority over the [JLC] lien IF made w/o knowledge.

However, the A9 secured creditor still has priority over the JLC when a future advance is made

• if made within 45-day’s after the lien’s creation (regardless of knowledge); or
• if there is knowledge, future advances will only have priority if they were made “pursuant to commitment entered into without knowledge of the lien.”

Question 2

What are nonadvances?

Answer 2

Nonadvances are obligations specified within the original agreement that may require the debtor to pay more to the creditor. Examples include attorneys fees and costs of collection in the event of default.

Question 3

How are (1) future advances and (2) nonadvances given priority in the real estate context?

Answer 3

Future advances:

Majority Rule: SCHUTZE - Mortgagee who makes an optional advance under original mortgage with full knowledge of an intervening JC still has priority with respect to the optional advance.

Minority Rule: No priority to optional advances given with full knowledge of JC, but priority to mortgagee who makes obligatory advance with full knowledge.

Nonadvances: UNI-IMPORTS - Priority of non-advances are tied to the priority of the advances they relate to.

Interest – directly connected to particular sums

Attorney’s fees and collection costs – just pro rate between the sums lent