#28 & #29 - Lien Creditors vs. Secured Creditors

Question 1

Priority of Future Advances

Answer 1

General Rule: perfected sec creditor beats lien creditor unless the judicial lien arises before secured interest’s perfection or before filing of financing statement and meeting one of 9-203b3’s requirements. 9-317a2

9-323b: 3 exceptions with the effect that a future advance secured by a security interest beats a lien if:
1) future advance is made within 45 days of the creation of the lien
2) future advance is made without knowledge (actual knowledge, 1-202) of the lien OR
3) future advance is made pursuant to a commitment (contractual obligation to lend, 9-102a68)

Any one of the 3 exceptions can apply independently to give prio to that future advance!

Policy: cutting off future advances by considering them new loans entirely would hurt lending, but so too would giving them complete prio over other newer junior lenders… so gotta find middle ground

Question 2

Terminology for Advances

Answer 2

Advance = a payment of money to borrower as a loan

Future advance = an advance made after 1) the initial advance or 2) the note and security agreement are signed

Non-advance = an amount that was not advanced to the borrower, but that the borrower is obligated to pay–this includes interest, attorneys’ fees incurred in collection, other expenses of the loan paid to 3rd parties

Question 3

Priority of Nonadvances

Answer 3

Rule = non advances have the priority of the advance to which they relate. Ex: interest (non-advance) on the first advance that is not subordinated to a lien still shares the prio of that advance.

Question 4

Who is a Lien Creditor?

Answer 4

Prototypical lien creditor is a judgment lien creditor

How to become judgment lien creditor?

Real estate: become judgment lien creditor by filing judgment where land records are recorded

Personal property: become judgment lien creditor by causing sheriff to levy (physically seize or otherwise constructively control) against the personal property.

A variation of “constructively control” is serving a writ of garnishment on a 3rd party

In a small minority of states, become judgment lien creditor against personal property by filing a judgment with the secretary of state

Question 5

When is a Lien Creditor Perfected?

Answer 5

System of priority: first in time, first in right

Precisely what must a lien creditor do to be first?
-> The act specified by the governing priority rule (317a2)
-> For lien creditors against real property: first to record is first
-> For execution creditors on personal property:
–» Majority rule: first to have sheriff levy based on creditor’s writ is first. But questions arise when C1 delivers a writ to the sheriff and then C2 delivers a writ, and sheriff levies on C2’s writ first and then on C1’s writ. Too bad. That’s how it works, C2 gets prio.
–» Minority rules: first to deliver writ to sheriff is first/file judgment in UCC system
–» Garnishment: when writ served on 3rd party

Question 6

Lien Creditor vs. Secured Creditor

Answer 6

System of prio: first in time first in right

Lien creditor: prio date against secured creditor is when this lien creditor becomes a perfected lien creditor 317a2

Secured creditor: prio date against lien creditor is earlier of perfection, 9-308a, OR filing and meeting one of 9-203b3’s conditions. 317a2
-> The most important one of these that comes up often is there is an authenticated security agreement.
-> It’s not necessary for the Art 9 sec party to have done everything (attach and perfect completely) in order to still beat a prior perfected lienholder. The Art 9 sec party will rank either as of the date of perfection or filing and one of the conditions in 203b3 are met (the attachment requirements, but not all of them necessarily).

PMSI secured creditor: gets prio upon attachment, provided that they file financing statement “within 20 days after” delivery of collateral. 9-317e
-> Imagine art 9 secured party attaches, lienholder comes in and seizes/perfects, then later still within 20 days of attachment, art 9 secured party files financing statement. The art 9 secured party wins.

Question 7

Essential Rule for Future Advances

Answer 7

Future advances have prio over intervening liens only if made:
1) within 45 days after lienor became a “lien creditor”
2) without knowledge of the lien, or
3) pursuant to commitment made without knowledge of the lien

Question 8

Common Traps

Answer 8

From 28.1 = beware that attachment isn’t necessary to beat a lien creditor necessarily, but at least part of it is (via 203(b)) and that part is usually an authenticated security agreement, which still makes an earlier filing of a financing statement the prio date even if the authentication of the sec agr / giving of value happens AFTER the lien creditor perfected. It makes the filing date prio.

From 28.5 = remember that sec ints in consumer goods perfect instantly upon attachment. But run analysis if not a consumer good anyway. If not consumer good, can still leverage a PMSI and have prio if you file a financing statement within 20 days of delivery under 9-317e.

From 28.6 = Even with a PMSI, still must have attachment and without authenticated sec agr, don’t have that. Also consumer goods not automatically perfected without attachment either!