Priorities

Question 1

As a general rule, who has priority in a conflict between two perfected secured creditors?

Answer 1

The first to file or perfect, whichever occurs first, has priority.

Question 2

As a general rule, who has priority in a conflict between two unperfected secured creditors?

Answer 2

The first to attach has priority.

Question 3

As a general rule, who has priority in a conflict between a perfected secured creditor and an unperfected secured creditor?

Answer 3

The perfected secured creditor has priority even if they took with knowledge of the earlier unperfected interest.

Question 4

What is the exception to the first to file or perfect rule as between competing perfected security interests?

Answer 4

Where the collateral is investment property, a security interest perfected by control has priority over a security interest perfected by any other method.

Question 5

What is the general priority rule for PMSIs?

Answer 5

PMSIs have a superpriority: they are superior to prior perfected security interest in the same collateral if certain conditions are met.

Question 6

What are the priority rules for PMSIs in inventory or livestock?

Answer 6

A PMSI in inventory or livestock has priority over a competing security interest in the same inventory or livestock (as well as proceeds that are chattel paper, instruments, or identifiable cash proceeds) if, before the debtor receives possession of the inventory or livestock, the secured party (1) perfects, and (2) sends an authenticated notification to holders of previously filed conflicting security interests. This notification will be effective for deliveries of the same type of collateral for five years.

Question 7

Is a consignor’s interest in consigned goods a PMSI?

Answer 7

Yes, it’s a PMSI in inventory and can get superpriority if it follows the priority requirements.

Question 8

What are the priority rules for PMSIs in goods other than inventory or livestock?

Answer 8

A PMSI in goods other than inventory or livestock has priority over a conflicting interest in the same goods or identifiable proceeds if the PMSI is perfected at the time the debtor receives possession or within 20 days after.

Question 9

Who wins when more than one party has PMSI super priority in collateral?

Answer 9

A seller financed PMSI has priority over a financer financed PMSI. Otherwise, the first to file or perfect prevails.

Question 10

Who wins when conflicting security interests in investment property were perfected by control?

Answer 10

They rank according to the time of taking control.

Question 11

Who wins when there are conflicting security interests in investment property and one security interest is held by the debtor’s intermediary?

Answer 11

The debtor’s intermediary has priority.

Question 12

What special priority rules apply to deposit accounts?

Answer 12

(1) A security interest perfected by control outranks one perfected via proceeds.
(2) Between two security interests perfected by control, they rank according to time of taking control.
(3) A secured party who obtained control by putting a deposit account in its own name outranks all other secured parties with control.
(4) A bank who controls because it maintains the account has priority over all other secured parties with control except a party who obtained control by putting a deposit account in its own name.

Question 13

What is the encumbrance on the transferee when a debtor transfers money or deposit account funds?

Answer 13

The transferee takes free of the security interest in the funds unless acting in collusion with the debtor to violate the creditor’s rights.

Question 14

When does a purchaser of chattel paper have priority of security interests in the chattel paper?

Answer 14

When a purchaser of chattel paper (including a party taking a security interest) in good faith gives new value and takes possession or control (if electronic) in the ordinary course of business, then they will have priority over a security interest in chattel paper arising merely as proceeds of inventory and any other security interest in the chattel paper if they acquired the chattel paper without knowledge of the secured party’s rights in it.

Question 15

When does a purchaser of an instrument have priority over a perfected security interest in the instrument?

Answer 15

If the purchaser (including a party taking a security interest) gave value and took possession in good faith and without knowledge of the rights of the secured party

Question 16

What is the general rule for priority as between a secured party and a buyer of collateral?

Answer 16

If you buy something with a security interest on it, the security interest stays on it.

Question 17

What does priority hinge on with respect to proceeds?

Answer 17

Whether the proceeds are from filing collateral (collateral in which a secured party would normally achieve priority by filing a financing statement) or from non-filing collateral (where priority would be achieved by possession or control).

Question 18

Under the first to file or perfect rule, when do the proceeds perfect?

Answer 18

They have the same date of priority as the the perfected interest in the original collateral, as long as the perfection in the proceeds extends beyond the 20 day temporary perfection period.

Question 19

What special priority rule applies to non-filing collateral?

Answer 19

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

(1) she has priority in the original collateral
(2) her security interest in the proceeds are perfected
(3) the proceeds are cash or the same type as the original collateral
* *if the proceeds are second generation, the intervening proceeds must be either cash, the same type as the original, or accounts relating to the collateral a se

Question 20

What happens to the priority in the proceeds when a security interest in original collateral that is non-filing collateral (and not perfected by filing) has proceeds that are filing collateral?

Answer 20

The first secured party to file a financing statement to cover the proceeds has priority in the proceeds.

Question 21

What is the general priority rule for security interests in fixtures?

Answer 21

In a context between a holder of a security interest in a fixture and a holder of an interest in the real property to which the fixture is attached, the first to file a fixture filing or record its real property interest prevails.

(there are exceptions to this)

Question 22

What is a fixture?

Answer 22

Goods so attached or otherwise related to real property that an interest in them (not built-in materials like bricks).

Question 23

What is a fixture filing?

Answer 23

A financing statement filed in the office where a mortgage on the real property would be recorded. It must contain a description of the real property to which the fixture is attached.

Question 24

When does a PMSI secured party have priority in a fixture?

Answer 24

In an exception to the general first to file/record rule, a PMSI secured party who makes a fixture filing within 21 days after affixation prevails over a real property interest in the same fixture recorded prior to affixation. This does not apply to a prior construction mortgage.

Question 25

When does a construction mortgage have priority over a PMSI in a fixture recorded within the 20 day grace period?

Answer 25

If the construction mortgage was recorded before affixation and the goods became fixtures before construction was completed.

Question 26

In what circumstances does a party with a security interest in a fixture not need to make a fixture filing to gain priority over the holder of the real property interest?

Answer 26

(1) readily removable collateral: a security interest perfected in any authorized manner before affixation will prevail over the real property interest if (a) the collateral is a readily removable office or factory machine, (b) the collateral is readily removable equipment not primarily used/leased for use in operation of real property, or (c) the collateral is a readily removable replacement of a domestic appliance that is a consumer good
(2) later acquired liens: a security interest in fixtures perfected in any manner authorized by the code will prevail over a later-acquired lien on the real property

Question 27

What is the effect on priority if the debtor has the right to remove fixtures?

Answer 27

The attached security interest in the fixtures has priority over the interest in the real property.

Question 28

Can a real property encumbrancer or owner consent to priority for the security interest in fixtures?

Answer 28

Yes, it can consent or disclaim its interest against either a perfected or unperfected security interest in fixtures in an authenticated record.

Question 29

What are accessions?

Answer 29

Goods united with other goods in a manner that their original identities are not lost (pedals on a bike).

Question 30

What is the general priority rule for accessions?

Answer 30

The general rules apply equally to accessions (first to file or perfect, PMSI superpriority)

Question 31

When do the general priority rules change with regard to priority in accessions?

Answer 31

If an accession is part of a whole that is subject to a security interest perfected by notation on a certificate of a title (e.g., a motor in a vehicle), the security interest in the whole has priority over the security interest in the accession.

Question 32

What is the effect of a fixture or accession interest with priority over all interests in the real property or goods?

Answer 32

The holder of the security interest may, upon default, remove the fixture or accession. If the debtor is not the owner of the real property, the creditor must reimburse the owner for any repairs for damage caused by removal but not for other diminution in value.

Question 33

Does a perfected security interest in crops have priority over a conflicting interest in the real property on which the crops are going?

Answer 33

Yes, regardless of the timing of filing or perfection.

Question 34

How does the code treat buyers of receivables?

Answer 34

Some receivables (accounts, chattel paper, payment intangibles, and promissory notes) are treated as creations of security interests rather than sales and are thus governed by the rules applicable between conflicting security interests.

Question 35

Can the buyer be authorized to take collateral free of the security interest?

Answer 35

Yes, the secured party can authorize the sale free of the interest either expressly or impliedly. The sale will be free by implication where (1) inventory is sold to an ordinary consumer when the sale is not expressly prohibited or (2) the creditor acquiesces to sales free of encumbrance.

Question 36

What is a buyer in the ordinary course?

Answer 36

A person who buys goods (1) in good faith, (2) without knowledge that the sale violates the secured party’s rights in the goods, (4) and in the ordinary course from a person in the business of selling goods of that kind.

Question 37

When do buyers in the ordinary course take free of a collateral’s security interest?

Answer 37

They take free of a security interest created by the seller even if perfected and even if the buyer knows of its existence.

Not applicable to: buyers of farm products from persons engaging in farming operations.

Question 38

When does a buyer (not in the ordinary course) prevail over a secured party?

Answer 38

A buyer of collateral or a lessee of goods takes free of a security interest if (1) she gives value and receives delivery of the collateral (no delivery requirement for intangibles) (2) without knowledge of the security interest (3) before its perfected.
– exception: If a secured party attaches a PMSI before the buyer without knowledge changes pays and receives delivery (if required), the secured party has priority over the buyer if they file within 20 days after the buyer receives collateral.

They take subject to perfected security interests.

Question 39

What is the garage sale rule?

Answer 39

For PMSIs in consumer goods (which perfect automatically), if the buyer of those goods resells to another consumer, the second buyer takes free of the security interest if he buys without knowledge, for value, and before a financing statement has been filed. (You lose to consumer buyers unless you file!)

Question 40

What is the time of perfection for a future advance?

Answer 40

Generally, if a creditor makes a future advance, the time of perfection of the advance relates back to the time of perfection in the original advance.

Question 41

How can a buyer obtain priority over a secured party making. future advance on collateral after the buyer has purchased the collateral?

Answer 41

A buyer not in the ordinary course can gain priority over such an advance if it was made after the secured party learned of the purchase or more than 45 days after the purchase unless it was pursuant to a commitment made w/o knowledge of the purchase and before expiration of the 45 day period.

Question 42

Who has priority between a security interest and a judgment lien creditor?

Answer 42

An unperfected security interest is subordinate to the rights of the lien creditor if they become a lien creditor before the security interest perfects.

A security interest perfected before the person becomes a lien creditor has priority.

Question 43

What is a judgment lien creditor?

Answer 43

A/K/A judicial lien creditor. A creditor who acquired a lien on the property involved by attachment, levy, etc. An unsecured creditor who obtains a judgment and levies on it. Includes trustee in bankruptcy.

Question 44

What special rules apply as between a judgment lien creditor and PMSI?

Answer 44

If the secured party files with respect to a PMSI within 20 days after the debtor receives possession of collateral, they tike priority over the rights of a lien creditor arising between the time the security interest attaches and the time of filing.

Question 45

When does a future advance by a secured creditor have priority over a judgment lien creditor?

Answer 45

If the future advance is made without knowledge of the lien or within 45 days of it arising, or pursuant to a commitment entered into without knowledge of the lien.

Question 46

What priority rules apply to statutes liens?

Answer 46

Liens granted by states to people who supply goods or services to secure payment (e.g., mechanic’s liens). Art 9 only governs wrt priority rules – these liens have priority over security interests in the collateral if goods/services provided in the ordinary course of business, collateral remains in lienholder’s possession (unless statute provides otherwise).