Priorities

Question 1

Determination of Priority

Answer 1

1. Identify the status of each claimant
2. Apply the appropriate priority rule

Question 1

Potential Claimants

Answer 1

1. Creditor
2. Transferees/Buyers
3. Other secured parties

Question 2

General Creditor (Unsecured)

Answer 2

One who has a claim, including a judgment, but has no lien or security interest with respect to the property in question (the collateral).

This type of creditor does not have a claim to particular property owned by the debtor.

A secured party will ALWAYS prevail over a general creditor with respect to the debtor’s collateral

Question 3

Judicial Lien Creditor

Answer 3

A creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law.

A perfected security interest has priority over a judicial lien creditor

A judicial lien creditor has priority over an unperfected security interest

Perfected Security Interest > judicial lien creditor > unperfected security interest

Question 4

Transferees

Answer 4

Persons who obtain full title to the goods as a result of a transfer of the collateral from the debtor

Question 5

Transferee vs. Secured Party with a Security Interest

Answer 5

If collateral is transferred from debtor to transferee, and the transferee is NOT a buyer, the security interest continues in the collateral unless the secured party authorized the transferee free of the security interest

TLDR: secured party still has a security interest in the collateral when up against a non-buyer transferee

Question 6

Buyer vs. Secured Party with an Unperfected Security Interest

Answer 6

A buyer of collateral goods, tangible chattel paper, tangible documents, or a security certificate (who is not secured party) takes free of an unperfected security interest in collateral if the buyer:
1. Gives value, AND
2. Receives delivery of the collateral
3. Without knowledge of the existing security interest

Question 7

Buyer vs. Secured Party with a Perfected Security Interest

Answer 7

A buyer of collateral subject to a perfected security interest generally takes the collateral SUBJECT TO that interest, unless the secured party has authorized its sale free of the security interest

Question 8

Buyer in the Ordinary Course of Business (BCOB)

Answer 8

A BCOB takes the goods free of a security interest that the seller gave to the creditor in the goods, even if the security interest is perfected AND the buyer knows of its existence

A BOCB is a person who:
1. Buys goods (not farm products)
2. In the ordinary course of business
3. From a merchant who is in the business of selling goods of that kind
4. In good faith, and
5. Without knowledge that the sale violates the rights of another in the same goods

Question 9

Consumer Buyer

Answer 9

A consumer buyer of consumer goods takes free of a security interest, even if perfected

A consumer buyer is a person who:
i. Buys consumer goods for value,
ii. For his own personal, family, or household use,
iii. From a consumer seller, AND
iv. Without knowledge of the security interest

Exception: consumer buyer does not take free of security interest if the secured party filed a financing statement covering the goods

Question 10

Special Problem: PMSI

Answer 10

If a financing statement for a PMSI in consumer goods is not filed, and the consumer buyer does not know of the PMSI, then he will take free of the security interest

If the party holding the PMSI in consumer goods does in fact file, then his security interest will be good even against a consumer buyer

Remember: A PMSI in consumer goods is automatically perfected upon attachment, regardless of whether a financial statement is required. Secured parties with a PMSI in consumer goods should file a financial statement to protect their interest against consumer buyers

Question 11

Perfected Security Interest vs. Perfected Security Interest

Answer 11

The first party to either file a financial statement OR perfect has priority

Question 12

Perfected Security Interest vs. Unperfected Security Interest

Answer 12

The perfected security interest takes priority over the unperfected one

Question 13

Unperfected Security Interest vs. Unperfected Security Interest

Answer 13

First party to have attached their interest has priority

Question 14

PMSI vs. Non-PMSI

Answer 14

Preference is generally given to a PMSI over a non-PMSI security interest

A PMSI in goods other than inventory or livestock prevails over ALL OTHER security interests in the collateral, even if the other security interests perfected earlier, so long as the PMSI is perfected before or within 20 days after the debtor receives possession of the collateral

Question 15

PMSI in Inventory or Livestock vs. Non-PMSI

Answer 15

PMSI prevails over all other security interests in the same collateral, even if they were previously perfected, if:
1. The PMSI is perfected by the time the debtor receives possession of the collateral, and
2. The purchase-money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security interest before the debtor receives possession of the collateral

Note: notification must state that the PMSI secured party has or expects to have a PMSI in the debtor’s inventory or livestock AND it must include a description

Question 16

PMSI vs. PMSI

Answer 16

The first party to either file a financial statement OR perfect has priority

Question 17

Proceeds from a PMSI in Goods

Answer 17

Generally extends to the identifiable proceeds of the original collateral, but only as to proceeds in which the security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter

Question 18

Construction Mortgage

Answer 18

A construction mortgage has priority over a subsequent security interest in a fixture, including a PMSI in a fixture

Construction mortgage must be recorded before the goods become fixtures, and it covers only goods that become fixtures BEFORE construction

Question 19

Proceeds

Answer 19

Generally, the first to file or first to perfect rule governs priority if there are conflicting security interests and at lease one of those interests is claimed as proceeds

The filing or perfection date for the original collateral is treated as the filing or perfection date for the proceeds