Priorities Flashcards
Generally
In resolving priority questions, it is important to determine the collateral involved and the types of parties involved.
Conflicts can arise between: (1) a secured party and another secured party; (2) a secured party and a buyer or other transferee of collateral; (3) secured party and a lien creditor or a holder of a possessor lien; and (4) a secured party and an Article 2 claimant.
Secured Party vs. Secured Party (Both unperfected)
First to attach (but could argue that perfection didn’t happen for some reason or another to attack the perfected party).
Secured Party vs. Secured Party (One perfected, one unperfected)
Generally, perfected security interest prevails over an unperfected security interest, even if the perfected security party takes the interest with knowledge of the earlier unperfected security interest.
Secured Party vs. Secured Party (Both perfected)
First to either file or perfect (whichever is earlier!). Note this is weird, so pay attention!
- If both perfected by filing financing statement (even if haven’t attached yet), whoever filed first wins.
- If one party perfected by filing and the other perfected by another method, the party who filed has priority if he filed before the other party perfected.
- If neither party perfected by filing, it is whoever perfected first.
Not affected by knowledge of another’s interest.
Secured Party vs. Secured Party (Both perfected) - Special Rules
Investment Property: General rules govern; however, security interest perfected by control has priority over any other method.
PSMI Superpriority: These are superior (but for them, the collateral would not be in debtor’s hands).
- (1) Inventory or livestock: This has priority over a conflicting security interest in the same collateral; applies if before debtor receives collateral, the secured party (1) perfects, and (2) sends an authenticated notification to holders of previously filed conflicting security interests.
- (2) Goods Other than Inventory and Livestock (almost always in equipment): This has priority over a conflicting interest in same goods (or identifiable proceeds); applies only if you perfect at time debtor receives collateral or 20 days after. If not 20 days, follow regular rules.
- (3) Conflicting PMSIs: seller financed has priority over financer financed
Purchasers of Chattel Paper and Instruments (not coming up)
Priority in Proceeds:
Fixtures, Accessions, Crops:
Deposit Accounts:
- (1) If secured party obtains control by putting deposit account in its OWN name, then it has priority over others on that account.
- (2) If secured party has control b/c it maintains the deposit account has priority over all others with control except for the one above.
Priorities in a Nutshell
Remember the following hierarchy: person with highest priority has first rights in collateral; if any part of the collateral or its proceeds is left, the next person can recover. Excluding investment property and non consumer deposit accounts, in which the party with control generally has priority, the ranking is as follows:
(1) Buyers in ordinary course of business who do not know sale is in violation of security interest.
(2) Holders in due course and the like of negotiable instruments
(3) Transferees of funds from deposit accounts
(4) Certain purchasers of chattel paper or instruments who have possession or control
(5) Possessory lienholders
(6) Article 2 claimants with possession of goods
(7) PMSIs (but consider automatically perfected PMSIs)
(8) Perfected security interests and liens that have attached to the collateral, the first to file or perfect has priority.
(9) Purchasers of collateral who buy for value and receive delivery without notice of any unperfected security interest.
(10) Unperfected security interests
(11) The debtor
Secured (Perfected) Party vs. Buyer
Generally, if you buy something with a perfected security interest on it, the interest stays on it. Exceptions apply if sales authorized.
Implied:
- (1) For (a) inventory sold to an (b) ordinary consumer when the security agreement is (c) silent
- (2) implied authority by acquiescence
If unauthorized, the general rule is that a buyer in the ordinary course of business takes free of the security interest created by the seller who is in the course of selling goods at that time. Important that interest is CREATED BY SELLER.
- This applies even if you know there is an interest on it; but if you know sale violates creditors rights, then you are not a buyer in the ordinary course.
Special Rule: Consumer to consumer sale; buyer takes free of security interest even though it is perfected if he buys without knowledge of the interest, for value, and for his own personal, family or household purposes, unless prior to the purchase the secured party has filed financing statement covering such goods.
Secured (Unperfected) Party vs. Buyer
Generally, buyer prevails if she gives value and received delivery of the collateral without knowledge of the security interest before it is perfected. So if they KNOW of it, then interest stays.
Secured Party vs. Judgment Lien Holder
Judgment lien holder: this is an unsecured creditor to start (owe them money); recovery money by suing and then sheriffs levies property (this is when it becomes a lien creditor).
If the security interest is perfected before the levy, the security interest has priority. If levy proceeds perfection, the judicial lien has priority.
Special Rule: PMSI vs. lien creditor - if secured party files with respect to PMSI within 20 days after the debtor receives possession of the collateral, he takes priority over the rights of a lien creditor which arises between the time the security interest attaches and the time of filing.
Secured Party vs. Statutory Lien Claimants
Statutory lien holder beats a perfected security interest.
Example: auto mechanic lien
