Priorities Flashcards
In priority disputes, purchasers of what should be treated as secured parties?
- Chattel paper
- Promissory notes
- Accounts
- Payment intangibles
Mnemonic: Cruel Poodles Poked Needles At Peaceful Iguanas
Who are the potential claimants in priority disputes?
- Secured creditors
- Unsecured creditors
- Lien creditors
- Purchasers of chattel paper, promissory notes, accounts, payment intangibles
- Buyers or transferees of other collateral
Do unsecured creditors have rights in the property?
No, but they likely have contract rights against the debtor
Who has priority: perfected security interest vs. perfected security interest? (no PMSIs)
The first in time to file or perfect
Who has priority: perfected security interest vs. unperfected security interest?
The perfected security interest
Who has priority: unperfected security interest vs. unperfected security interest?
The first to attach or become effective
Who has priority: perfected security interest vs. lien creditor?
The perfected security interest
Who has priority: unperfected security interest vs. lien creditor?
The lien creditor
Filed but unattached exception: If a financing statement has been filed but the collateral is not attached, then the security interest has priority
Who has priority: security interest vs. statutory lien?
The statutory lien, as long as:
- The effectiveness of the lien depends on the lienholder’s possession of the goods
- The lien secures payment or performance of an obligation for services furnished in the ordinary course of the person’s business; and
- The statute doesn’t provide otherwise
Note: This applies even if the security interest is perfected
Who has priority: secured party vs. secured party over future advances?
The first to file or perfect with respect to future advances
Note: This applies even if the secured party has knowledge of the competing security interest when the future advance is made
Who has priority: secured party vs. lien creditor over future advances?
If the advance is made within 45 days of the lien creditor’s lien arising, then the secured party has priority
Otherwise, if:
- The advance is made more than 45 days after the person becomes a lien creditor; and
- The advance is made without the knowledge of the lien OR pursuant to a commitment entered without knowledge of the lien;
then the lien creditor has priority
If there is a dispute between a buyer and a secured party, how do you phrase the priority question?
Did the buyer take the collateral free of a security interest or subject to a security interest?
What is the general rule for buyer vs. perfected security interest?
Unless the secured party authorizes the sale free and clear of its security interest, a buyer takes subject to a perfected security interest
What are the exceptions for buyer vs. perfected security interest?
- Buyer in the ordinary course of business (BIOCB)
- Garage sale exception (consumer to consumer exception)
What are the requirements for a buyer in the ordinary course of business (BIOCB) exception?
- The buyer buys goods from a merchant
- In the ordinary course of the merchant’s business
- The buyer acts in good faith
- The buyer has no knowledge that the sale violates the rights of others in the same goods
- The seller is engaged in the business of selling goods of this kind
- The seller is not a pawn broker
What is the result of the buyer in the ordinary course of business (BIOCB) exception?
The buyer takes free of a security interest
Note: This is even if the security interest is perfected and even if the buyer knows of the existence of the security interest
What are the requirements for the garage sale exception?
- The buyer buys consumer goods for value
- For their own personal, family, or household use
- From a consumer seller
- Without knowledge of the security interest
UNLESS the secured party has filed a financing statement before the purchase
What is the result of the garage sale exception?
The buyer takes free of a security interest
Note: This is even if the security interest is perfected
What is the general rule for buyer vs. unperfected security interest?
Unless a secured party authorizes the sale free and clear of the security interest, the buyer takes subject to a security interest
When does a buyer take free of an unperfected security interest?
If the buyer:
- Gives value;
- Receives delivery of the collateral; and
- Has no knowledge of the preexisting interest
When does the priority rule for buyers and future advances apply?
- If the buyer takes subject to a security interest, and
- After the sale, the secured party makes a future advance to the debtor/seller
When does a buyer take free of a future advance?
If:
- The secured party had knowledge of the buyer’s purchase when it made the advance, OR
- The future advance is made at least 45 days after the purchase
For a purchaser of chattel paper and instruments, what is the (oversimplified) priority rule?
The purchasers (secured party) who takes possession of the collateral without knowledge of the competing security interest will often have priority over competing secured parties.
What is the priority rule for a transferee of money or deposit account funds (i.e. a person who receives money subject to a security interest)?
The transferee takes free of security interests unless the transferee acts in collusion with the debtor to violate the rights of a secured party
What happens to the security interest if collateral is transferred and the transferee of the collateral is not a buyer (e.g. the transfer is a gift)?
The security interest generally continues in the collateral, unless the secured party has authorized its sale free of the security interest.
Who has priority: security interests vs. buyer/seller with UCC Article 2 security interests?
The buyer/seller with Article 2 security interests, as long as the buyer/seller retains possession of the goods
Who has priority: PMSI vs. lien creditor?
The lien creditor
Exception: If the PMSI is perfected within 20 days of the debtor receiving possession of the collateral, then the PMSI has priority
Who has priority: PMSI in goods other than inventory or livestock vs. security interest?
If the secured party perfects within 20 days of the debtor receiving the goods, the PMSI has priority.
Otherwise, it’s secured party vs. secured party (first in time to file or perfect)
Who has priority: PMSI in inventory or livestock vs. security interest?
The PMSI, if the secured party:
- Perfects before the inventory is delivered to the debtor, and
- Sends an authenticated notification of the PMSI to other secured parties (effective for 5 years)
Otherwise, it’s secured party vs. secured party (first in time to file or perfect)
For priority disputes, if a security interest is perfected in proceeds and has been continuously perfected, then how do you measure the secured party’s status?
Based on the time of filing or perfection as to the original collateral
If a PMSI has priority over a competing secured party in goods other than inventory, what is the effect on the proceeds of the collateral?
The PMSI’s super priority extends to the proceeds
If a PMSI has priority over a competing secured party in inventory, when does the priority extend to proceeds?
When the proceeds are up-front cash payments for the inventory sold
Who has priority: seller PMSI vs. lender PMSI?
The seller PMSI
Who has priority: PMSI vs. PMSI?
First to file or perfect
Who has priority: security interest in fixtures vs. real property interest?
The security interest in fixtures, if the secured party files a fixture filing before the real property interest is recorded
What is a fixture filing?
A financing statement filed in the local real property records
Who has priority: PMSI in fixtures vs. real property interest?
The PMSI in fixtures, if:
- The debtor has an interest of record in the real property OR is in possession of the real property; and
- The security interest is perfected by a fixture filing, either before the goods become fixtures or within 20 days after the goods become fixtures
Who has priority: construction mortgage vs. subsequent security interest in fixtures?
The construction mortgage, if:
- It is recorded before the goods become fixtures, and
- The goods become fixtures before completion of the construction
Note: This applies to PMSIs in fixtures
Which priority rules apply for consignments?
PMSI in inventory
