Priorities Flashcards
How does priorities work in secured transactions?
Can a party agree to subordinate their interest?
Article 9 prioritizes claims and pays them in order.
The holder of a priority can agree to subordinate this interest to another’s interest
Who are the claimants regarding priorities?
Creditors
Transferees/buyers
Other secured parties
What are the three different types of creditors?
What is the overall priority rule that applies to each?
General creditor (unsecured)
-> has a claim, including a judgment, but no lien on or SI in collateral
-> result - a party with a SI always prevails over a general creditor’s rights in the debtor’s collateral
Judicial lien creditor
-> acquires a lien on the collateral by a judicial process
-.> result - a perfected SI has priority over a judicial lien; a judicial lien has priority over an unperfected SI UNLESS the only reason the SI was unperfected was that the secured party had not yet given value
Statutory or common-law lien creditor:
-> has a possessory lien on the collateral by statute or common-law rule (i.e., a nonconsensual lien)
-> result - a possessory lien has priority over ANY SI if the lien secures payment for goods or services furnished in the ordinary course of business (e.g., mechanic’s lien) unless a statute provides different priority rule
What is the PMSI exception relating to creditors under the priority rules?
-> PMSI exception - if a PMSI is perfected before or within 20 days after the debtor receives possession of the collateral, the PMSI has priority over a creditor’s rights that arose between the time of attachment of the SI and filing
Who has priority between a party with a SI in an advance and a lien creditor?
-> Advances - a SI securing an advance is subordinate to a lien creditor’s rights when the advance is made more than 45 days after the person becomes a lien creditor, UNLESS the advance or commitment is made without knowledge of the lien
What does the transferee obtain as a result of the transfer of collateral to the transferee from the debtor?
Does the secured interest still exist in the following situations after the transfer, if so who has priority:
-> transferee v. secured party with a SI
-> buyer’s rights vs. unperfected SI
-> buyer’s rights vs. perfected SI
Transferees obtain full title to collateral as result of a transfer from the debtor
General rules:
-> transferee v. secured party with an SI - the SI generally continues in the collateral unless the secured party authorizes the transfer free of the SI
-> Buyer’s rights v. unperfected SI - the buyer takes the collateral free of the SI if the buyer (i) gives value, AND (ii) receives delivery, (iii) WITHOUT knowledge of the SI
-> buyer’s rights v. perfected SI - the buyer generally takes the collateral subject to the SI unless the secured party authorizes the transfer free of the SI
Does the secured interest still exist in the following situations after the transfer, if so who has priority:
-> buyer in the ordinary course of business
Buyer in the ordinary course of business (BOCB):
-> buys goods (not farm products) by giving new value (e.g. cash, etc., BUT NOT satisfaction of existing debt)
-> in the ordinary course (to himself)
-> from a seller in the business of selling goods of that kind
-> in good faith
AND
-> without actual knowledge that the sale violates another’s rights in the goods
—-> Result - BOCB takes free of any SI in goods given by buyer’s seller
What is the “garage sale” rule, how does it work?
Consumer buyer
-> buys consumer goods for value
-> for his own personal, family or household use
-> from a consumer seller
AND
-> without knowledge of the security interest
—-> Result - a consumer buyer takes free of any SI in consumer goods unless a secured party has filed a financing statement covering the goods (it’s the “garage sale” rule)
Does the secured interest still exist in the following situations after the transfer, if so who has priority:
-> purchaser of chattel paper
Purchasers of chattel paper
-> gives new value and gets possession/ control of collateral
-> purchase is made in good faith and in the ordinary course of business
AND
-> the chattel paper does not indicate an assignment to an identified assignee who isn’t the purchaser (e.g. for an SI claimed as proceeds of inventory), OR a purchase made without knowledge that the purchase violates secured party’s rights (for all other SIs)
—-> Result - a purchaser of chattel paper has priority over a SI in the chattel paper
Does the secured interest still exist in the following situations after the transfer, if so who has priority:
-> Buyer of negotiable instrument or document
-> Buyer not in the ordinary course of business regarding future advances
Buyer of negotiable instrument or document
-> the buyer takes free of any SI, buyer has priority over all
Buyer not in the ordinary course of business regarding future advances
-> the buyer generally takes free of any SI that secures an advance made after the earlier of (i) the time the secured party acquires knowledge of purchaser or (ii) 45 days after purchase
-> the buyer takes subject to the SI if the advance is made pursuant to a commitment entered into without knowledge of the buyer’s purchases and before the expiration of the 45-day period
Does the secured interest still exist in the following situations after the transfer, if so who has priority:
-> transferee of money or funds
-> article 2 security interest
-> “clean” certificate of title
Transferee of money or funds
-> generally takes free of an SI in money or funds; a debtor is not treated as a transferee
Article 2 security interest
-> an art. 2 SI of a buyer or seller with possession of the goods has priority over an Art. 9 SI
“Clean” certificate of title
-> a buyer without knowledge of a prior SI not noted on the title takes the goods free of that SI
What is the general rule regarding priorities among secured parties?
-> perfected SI v. perfected SI
-> perfected SI v. unperfected SI
-> unperfected SI v. unperfected SI
Perfected SI v. perfected SI
-> the first to file or perfect has priority; a lapse in filing or perfection restarts the clock
Perfected SI v. unperfected SI
-> perfected SI has priority over an unperfected SI
Unperfected SI v. unperfected SI
-> the first to attach has priority (“first in time, first in right” rule)
What are the PMSI priority rules amongst secured parties?
-> PMSI v. non-PMSI
-> Perfected PMSI v. perfected PMSI
-> Proceeds from PMSI in goods
PMSI v. non-PMSI
-> generally, a PMSI has priority over a prior non-PMSI SI
Perfection PMSI v. perfected PMSI
-> the first to file or perfect has priority
—-> Exception - a seller with a PMSI has priority over a lender with a PMSI
Proceeds from PMSI in goods
-> priority of a PMSI in goods generally extends to the proceeds of the original collateral, ONLY IF the proceeds subject to the SI is perfected when the debtor receives possession of collateral or within 20 days thereafter
What are the PMSI priority rules amongst secured parties?
-> PMSI in goods other than inventory or livestock v. any SI
-> PMSI in inventory or livestock v. any SI
PMSI in goods other than inventory or livestock v. any SI
-> a PMSI has priority if perfected before or within 20 days after the debtor receives possession of collateral
PMSI in inventory or livestock v. any SI
-> a PMSI has priority if perfected by the time the debtor receives possession of the collateral, AND the purchase-money secured party sends an authenticated notice of the PMSI to the holder of any conflicting SI before the debtor receives possession of the collateral (notification is required only when the SI was perfected by filing)
What are the priority rules regarding fixtures?
-> SI in fixture v. real property interest
-> Perfected SI in fixture v. subsequent judicial lien
-> PMSI in fixtures v. prior real property interest
-> SI in fixtures v. prior construction mortgage
SI in fixture vs. real property interest
-> an SI in fixtures has priority over an interest in the real property with which the fixtures are associated if the SI in fixtures is perfected by a fixture filing before the real property interest is recorded
Perfected SI in fixtures vs. subsequent judicial lien
-> a perfected SI in fixtures has priority
PMSI in fixtures v. prior real property interest
-> a PMSI in fixtures has priority if it is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter
SI in fixtures v. prior construction mortgage
-> a prior constructive mortgage has priority if recorded before the goods become fixtures
