Priorities

Question 1

Perfected vs Unperfected interests

Answer 1

A perfected interest has priority over a conflicting unperfected security interest in the same collateral (even if the unperfected interest is a purchase money interest in inventory

Question 2

Multiple perfected creditors

Answer 2

a) Between multiple creditors, the first to file obtains priority (even if a party files before they perfect for priority purposes).
(b) Some collateral is not subject to the state filing system or cannot otherwise be filed. In these instances, the first to perfect obtains priority.
(c) Generally, knowledge of a prior unperfected interest will not prevent a potential secured party from filing first to obtain priority.

Question 3

Lien creditor

Answer 3

Lien creditors possess virtually the same status as perfected secured creditors. Accordingly, if a party becomes a lien creditor before a secured party files or perfects, the lien creditor will enjoy priority over that party. Their priority extends to future advances secured:

(1) Before the lien arose
(2) within 45 days of the lien; OR
(3) without knowledge of the lien

Question 4

Buyers in the ordinary course of business

Answer 4

Buyers in the ordinary course of business are protected even though their interest in the property is created after the attachment or perfection of a security interest.
Buyers in the ordinary course of business take the collateral free of the security interest created by the seller.

Question 5

who is a buyer in the ordinary course of business?

Answer 5

A buyer in the ordinary course of business is a person who:

(1) In good faith and without knowledge that the sale to him is in violation of the security interest of a third party;
(2) Buys in the ordinary course from a person in the business of selling goods that kind.

Question 6

Shelter Principle

Answer 6

The protected buyer may sell the purchased collateral to a third party free of the secured party’s security interest.

Question 7

Consumers buying from consumers

Answer 7

A buyer of consumers goods take the goods free of a security interest, even if perfected, if the buyer buys:

(1) Without knowledge of the security interest
(2) For value
(3) Primarily for the buyer’s personal, family or households purposes; AND
(4) Before the filling of a financing statement covering the goods.

Question 8

Purchase-Money security Interest (PMSI)

Answer 8

Generally, PMSI have priority over prior perfected security interests if the PMSI is properly executed. A PMSI is either:

(1) A security interest held by the seller of collateral to secure payment of all or part of the price; OR
(2) A security interest of a person that gives value to a debtor so that the debtor may acquire

Question 9

PMSI in Inventory

Answer 9

A PMSI in inventory collateral’s priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time debtor received posession and notice is provided to prior creditors. However, an unperfected PMSI inventory will NOT have priority over a perfected security interest in the same collateral.

Question 10

PMSI Non-inventory

Answer 10

A PMSI in a non-inventory collateral (e.g regular goods) has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter (i.e the creditor has 20 day-grace period to file upon receipt of the collateral).

Question 11

PMSI in Consumer Goods

Answer 11

Remember, a PMSI in a consumer goods perfects automatically upon attachment (no filing requirement)