Priorities

Question 1

What is the result of a perfected security interest vs. a lien creditor?

Answer 1

Perfected security interest takes priority.

Question 2

What is the result of a buyer vs. an unperfected security interest?

Answer 2

Unless secured party states otherwise, buyer takes subject to unperfected security interest.

Exception: Gives value, receives delivery, and without knowledge of preexisting interest.

Question 3

What is the result of a secured party vs. a secured party over future advances?

Answer 3

Article 9 gives priority to the first party to file or perfect with respect to future advances. This is true even if that secured party has knowledge of the competing security agreement.

Question 4

What is the order of distribution for proceeds of a disposition?

Answer 4

1. Reasonable expenses for collection and enforcement
2. Pay the debt to the foreclosing secured party.
3. Pay subordinate security interests, provided that subordinated party make s formal demand.
4. Any surplus to debtor.

Note: senior interest survive sale, so if debtor still owes, can seek a deficiency judgement.

Question 5

What is the result of an unperfected security interest vs. a lien creditor?

Answer 5

Lien creditor takes priority.

Exception: Filed but unattached.
- If the debtor has authenticated a security agreement listing the collateral and a financing statement is on file, but secured party has not yet given value, the secured party takes priority.

Question 6

When does a PSMI in goods other than inventory or livestock take priority?

Answer 6

If secured parrty, within 20 days of the debtor receiving goods, perfects.

Question 7

When will a PMSI in inventory or livestock take priority?

Answer 7

When the secured party perfects before the inventory is delivered to the debtor and sends an authenticated notification of the PMSI to other secured parties.

Question 8

What happens when a PSMI has priority over a competing secured goods other than inventory?

Answer 8

Priority extends to collateral.

Question 9

What is the result of an unperfected security interest vs. a unperfected security interest?

Answer 9

First to attach or become effective wins.

Question 10

What is the result of a perfected security interest vs. an unperfected security interest?

Answer 10

Perfected takes priority.

Question 11

How does the priority question change for buyers?

Answer 11

Ask if the buyer takes the collateral free of a security interest, or subject to it.

Question 12

What is the priority rule for purchasers of chattel paper and instruments?

Answer 12

Purchasers/secured parties who take possession of the collateral without knowledge of the competing interest will often have priority.

Question 13

Does a seller PSMI beat a lender PSMI?

Answer 13

Yes.

Question 14

What is the result of a perfect security interest vs. a perfect security interest?

Answer 14

First in time to file or perfect takes priority.

Question 15

What is the result of a secured party over a lien creditor over future advances?

Answer 15

If a secured party’s advance is made within 45 days of the lien creditor’s lien arising, the secured party has priority.

Advances made more than 45 days after the person becomes a lie creditor are subordinate. Unless: the advance is made without knowledge of the lien or made pursuant to a commitment entered into without knowledge of the lien.

Question 16

What is the rule for buyers and future advances?

Answer 16

Buyer takes free of future interest if; (1) the secured party had knowledge of buyer’s purchase when it made the advance or; (2) the future advance is made 45 days or more after purchase.

Applies if a buyer takes subject to a security interest and after the sale, the secured party made a future advance to debtor or seller.

Question 17

What is the result of a security interest vs. a statutory lien?

Answer 17

Statutory lien has priority if;

• the effectiveness of the lien depends on lien holders’ possession of the goods;
• The lien secures payment/performance of an obligation for services or materials furnished in the ordinary course of the person’s business; and
• Statute does not provide otherwise

Note: will have priority even over perfected security interest.

Question 18

What is the result of a PSMI vs. a lien creditor?

Answer 18

Follow the general priority rule for lien creditors vs. security interest. (perfected takes priority, unperfected does not, unless filed but unattached).

Except that PSMIS have a 20 day grace period when the debtor receives possession of collateral to perfect.

Note: if the PSMI secured party perfects within 20 days of the debtor receiving possession of the collateral, the PSMI will take priority over a lien that arose during that 20 day period.

Question 19

What is the rule for fixtures vs. real property interest?

Answer 19

General Rule: A security interest in fixtures as priority over an interest in real property if the secured party files a fixture filing before the real property interest is recorded.

PSMI Rule: A PMSI in fixtures has priority if the debtor has an interest of record in the real property or in possession of the real property and the security interest is perfected by the fixture filing, either before the gods become fixtures, or within 20days after the goods become fixtures.

Exception: Construction Mortgage. Will have priori y over any subsequent interest in fixtures if it is recorded before the goods become fixtures and goods become fixtures before completion of construction.

Question 20

What is the result of a buyer vs. a perfected security interest?

Answer 20

Buyer takes subject to a perfected security interest unless one of three exceptions are met.

1. Specified otherwise
2. Buyer in the Ordinary Course of Business (BIOCB)
   - Buyer buys goods from merchant, in the ordinary course of the merchant’s business
   - Buyer acts in good faith and without knowledge that the sale violates the rights of others in the same goods.
   - Seller is engaged in the business of selling goods of the kind and is not a pawn broker.
3. Garage-Sale Exception
   - Buyer buyers goods for value for own, personal, home use, from a consumer seller and without knowledge of security interest.
   Exception to exception: if party filed a financing statement.

Question 21

What happens with security interests vs. buyers’ and sellers’’ Article 2 security interests?

Answer 21

If a buyer or seller has a security interest arising under Article 2 of the UCC, that interest has priority over an Article 9 security interest, as long as the buyer or seller retains possession of the goods.