Priorities

Question 1

What is Priority?

Answer 1

When a debtor defaults and a number of persons have an interest in the same item of collateral, the person with the highest priority has first rights in the collateral; if any part of the collateral or its proceeds is left, the next person can recover, etc.

Question 2

What is the Rule for Priority Between Between Perfected Secured Parties?

Answer 2

When there are conflicting perfected security interests in the same collateral, priority goes to whichever party was the first to either file or perfect — whichever is earlier — provided that there is no period thereafter when there is neither filing nor perfection.

Question 3

What is the Rule for Priority Between Unperfected Secured Parties?

Answer 3

When two unperfected security interests conflict, the first to attach has priority.

Question 4

What is the Rule for Priority Between Unperfected and Perfected Parties?

Answer 4

A perfected security interest generally prevails over an unperfected security interest.

Question 5

What is the PMSI Superpriority Rule?

Answer 5

PMSIs enjoy a superpriority. They’re superior to prior perfected security interests in the same collateral if certain conditions are met.

PMSI can be obtained in the following types of Collateral:

1. PMSI in Goods Other than Inventory and Livestock
2. PMSI in Inventory and Livestock
3. Consignor Has PMSI in Inventory:

Question 6

What is the Rule for PMSI in Goods Other than Inventory and Livestock?

Answer 6

A PMSI in goods other than inventory and livestock (for example, equipment) has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after the debtor receives possession of the goods.

Question 7

What is the PMSI rule for Inventory and Livestock?

Answer 7

A PMSI in inventory collateral has priority over a conflicting security interest in the same inventory or proceeds of the inventory that are chattel paper, instruments, or cash if:

1. It is perfected at the time the debtor gets possession of the inventory (filing must take place before the inventory is delivered to the debtor), and
2. Any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory
3. The notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type.

Question 8

What is the PMSI rule for when the Consignor has PMSI in Inventory?

Answer 8

Under Article 9, a consignor’s interest in the consigned goods is considered to be a PMSI in inventory. Therefore, a consignor can acquire PMSI superpriority in consigned goods if the consignor complies with the above requirements for gaining PMSI superpriority in inventory.

Question 9

What is the Rule for Conflicting PMSIs?

Answer 9

If more than one party has PMSI superiority in collateral, the following rules apply:

1. A secured party who has a PMSI in collateral as a seller (a seller-financed PMSI) has priority over a secured party who has a PMSI in the same collateral as a lender (a financer-financed PMSI)
2. Otherwise, the first secured party to file or perfect prevails

Question 10

What are the Special Priority Rules for Conflicting Security Interests in Investment Property?

Answer 10

A security interest perfected by control has priority over a security interest perfected by any other method (by filing or automatic perfection).

• For conflicting security interests perfected by control, they rank according to the time of obtaining control (unless one of the secured parties with control is a securities intermediary, in which case the securities intermediary will prevail).
• In all other cases, the “first to file or perfect” rule governs priority questions for investment property.

Question 11

What are the Special Priority Rules for Conflicting Security Interests in Deposit Accounts?

Answer 11

A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method (namely, as proceeds of other collateral)

If there are conflicting security interests that are perfected by control, they rank according to the time of obtaining control, subject to the following exceptions:

1. A secured party who has obtained control by putting the deposit account in the party’s name has priority over all other secured parties with control, and
2. A bank that has control because it maintains the deposit account has priority over all secured parties with control, other than the party who has obtained control by putting the account in their name.

Question 12

What are the Priority Rules for Purchasers of Chattel Paper and Instruments?

Answer 12

Article 9 contains special rules for purchasers of chattel paper and instruments, which includes parties who take a security interest.

Chattel Paper Purchasers — If a purchaser of chattel paper in good faith gives new value and takes possession of the chattel paper in the ordinary course of business (or takes control of electronic chattel paper), the purchaser has priority over:

1. A security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper doesn’t indicate that it has been assigned to anyone other than the purchaser
2. Any other security interest in the chattel paper, as long as the chattel paper purchaser acquired their interest without knowledge that its purchase violated the rights of the secured party

Instrument Purchasers: A purchaser of an instrument has priority over a perfected security interest in the instrument if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party

Question 13

What are the Priority in Proceeds Rules?

Answer 13

Generally, a perfected security interest in proceeds will have the same date of priority as the perfected security interest in the original collateral (for example, under the “first to file or perfect” rule), as long as the perfection of the security interest in the proceeds extends beyond the 20-day temporary perfection period.

For purposes of determining the priority of security interests in proceeds, the Code divides collateral into filing collateral and non-filing collateral

• Filing Collateral: Collateral in which a secured party would normally achieve priority by filing a financing statement (goods, accounts, commercial tort claims, general intangibles, and nonnegotiable documents).
• Non- Filing Collateral: Collateral in which a secured party would normally achieve priority by possession or control, rather than filing (cash, chattel paper, nonconsumer deposit accounts, negotiable documents, instruments, and investment property).

Question 14

What is the Special Rule for Certain Proceeds of Non-Filing Collateral?

Answer 14

A secured party has priority in the proceeds of non-filing collateral if:

1. The secured party has priority in the original collateral
2. Their security interest in the proceeds is perfected
3. The proceeds are cash proceeds or proceeds of the same type as the original collateral

EXCEPTION — Filing Collateral as Proceeds of Non-Filing Collateral: If a security interest in original collateral that is non-filing collateral is perfected by a method other than filing, and the proceeds of the original collateral are filing collateral, the first secured party to file a financing statement covering the proceeds has priority in the proceeds.

3a. If the proceeds are proceeds of proceeds, all intervening proceeds must be:

• a) cash proceeds,
• b) proceeds of the same type as the original collateral, or
• c) accounts relating to the collateral.

Question 15

What is the Rule for When Secured Party vs. Buyer or Other Transferee?

Answer 15

When a buyer (or lessee) buys or leases something with a security interest on it, the security interest stays on the item.

Question 16

What are the Exceptions to the General Rule for When it is a Secured Party vs. Buyer or Other Transferee?

Answer 16

A) Authorized Sales: If the sale or lease of the collateral is authorized by the secured party free of the security interest, the transferee takes free of the security interest.

• The authorization may be express, or it may be implied from the type of sale or from the seller’s conduct.

B) Unauthorized Sales

Buyers in the Ordinary Course: A buyer in the ordinary course of business (“BIOC”) takes free of a nonpossessory security interest in the goods created by the buyer’s seller, even though the security interest is perfected and even though the buyer knows of the security interest.

Buyers Not in the Ordinary Course of Business: A Buyers or lessees NOT in the ordinary course of business:

1. Take subject to perfected security interests AND
2. Take free from unperfected security interests unless they know of the security interest when they give value or take delivery

Consumer-to-Consumer Sales: In the case of consumer goods, a buyer takes free of a security interest, even though it’s perfected, if the buyer buys (1) without knowledge of the security interest, (2) for value, (3) for the buyer’s own personal, family, or household purposes, and (4) before a financing statement covering the goods has been filed.

• NOTE: The goods must be consumer goods in the hands of both the buyer and the seller.

Exceptions to the Buyer Not in Ordinary Course of Business Rule

1. Future Advances: A buyer or lessee not in the ordinary course of business has priority over future advances or commitments to make future advances made by a secured party either after the secured party learns of the purchase or lease or more than 45 days after the purchase or lease.
2. PMSI Grace Period: If a secured party attaches a PMSI in the debtor’s collateral BEFORE the buyer or lessee without knowledge pays value and receives delivery, the secured party will have priority over the buyer or lessee if the secured party files within 20 days after the debtor receives the collateral.

Question 17

What are the Requirements to be a Buyer in the Ordinary Course of Business?

Answer 17

A buyer in the ordinary course is one who buys goods:

1. In good faith
2. Without knowledge that the sale violates the rights of another person in the goods, and
3. In the ordinary course of business from a seller in the business of selling goods of the kind purchased.

Question 18

What is the Rule for a Secured Party vs. Holder in Due Course or the Like?

Answer 18

A holder in due course of a negotiable instrument (and similar holders of negotiable documents of title or securities) has priority over a security interest in the negotiable instrument.

Question 19

What is the Rule for Secured Party vs. Judicial Lien Creditor or Holder of Possessory Lien?

Answer 19

A) Secured Party vs. Judicial Lien Creditor: A judicial lien creditor (a person who has acquired a lien on the collateral through judicial attachment, levy, or the like, or a bankruptcy trustee) prevails over the holder of a security interest in collateral if the lien creditor becomes such before the security interest is perfected. On the other hand, a prior perfected security interest has priority over a judicial lien.

• Prior Filed Security Interest May Also Have Priority: A secured party has priority if the secured party perfected before the judicial lien arose. However, the secured party will also have priority if the secured party obtained a security agreement and filed a financing statement (but did not attach and perfect) before the judicial lien arose, as long as the secured party eventually attaches and perfects.
• PMSI Grace Period Exception: If the secured party files a financing statement with respect to a PMSI within 20 days after the debtor receives the collateral, the secured party will have priority over a judicial lien arising between the time the security interest attaches and the time of filing.

B) Secured Party vs. Possessory (Statutory) Lien Holder: A possessory lien imposed by other (non-Code) state law in favor of those who supply goods or services (for example, an artisan’s lien or a materialman’s lien) has priority over a security interest (even if perfected) as long as the goods or services were provided in the ordinary course of business and the collateral remains in the lien holder’s possession.

Question 20

What is the Rule for a Secured Party vs. Article 2 Claimant?

Answer 20

If Article 2 grants a buyer or seller a possessory security interest in goods (for example, if the buyer rightfully revokes acceptance of goods), the Article 2 claimant has priority over an Article 9 secured party as long as the Article 2 claimant retains possession of the goods.

Question 21

What is the General Priorities Rankings?

Answer 21

1. Buyer in the ordinary course of business, if the security interest is created by the buyer’s seller
2. Holder in due course and the like of a negotiable instrument
3. Transferee of money or funds from deposit accounts
4. Certain purchasers of chattel paper or instruments who have possession or control
5. Possessory lienholder
6. Article 2 claimant with possession of goods
7. PMSI (except that a consumer purchaser from a consumer—such as a neighbor buying from a neighbor—has priority over an automatically perfected PMSI in the consumer goods)
8. Perfected security interests and judicial liens that have attached to the collateral (including trustees in bankruptcy as of the date the bankruptcy petition is filed)
9. As between perfected security interests in the same collateral, the first to file or perfect has priority
10. As between a perfected security interest and an attached lien, the attached lien generally has priority if it attached before the security interest was perfected. Otherwise, the security interest has priority
11. Purchaser of collateral who buys for value and receives delivery without notice of any unperfected security interest
12. Unperfected security interests (rank in priority according to order of attachment)
13. Debtor