Priorities Flashcards
Can parties assert priority by prior agreement
Yes, this is called a subordination agreement.
*Priority in proceeds
A perfected security interest in proceeds will have the same date of priority as the perfected security interest in the original collateral , as long as the perfection of the security interest in the proceeds extends beyond 20-day temporary perfection period (unless one of the exceptions applies)
*Buyer in ordinary course of business
The buying party takes, but
A purchaser of collateral takes the asset free and clear of a security interest only when they:
purchase for value, without notice, in the ordinary course of business (e.g. chair manufacturer selling promissory notes is not ordinary course of business);
but, if chair manufacturer’s creditor had security interest in inventory and third party bought inventory of chairs without notice and for value, then it would be in ordinary course of business and the security interest would not transfer
*if security interest does not pass, then creditor has the right to proceeds to the sale.
*Priorities in a Nutshell
- buyer in the ordinary course of business who does not know the sale is in violation of security interest
- holder in due course and the like of a negotiable instrument
- transferee of money or funds from deposit account
- certain purchasers of chattel paper or instruments who have possession or control
- possessory lienholder
- article 2 claimant with possession of goods
- PMSI (except that a consumer purchaser from a consumer has priority over an automatically perfected PMSI in the consumer goods)
- perfected security interests and judicial liens that have attached to the collateral (including trustees) in bankruptcy as of the date the bankruptcy petition is filed)
(a) as between perfected security interests in the same collateral, the first to file or perfect has priority.
(b) as between a perfected security interest and an attached lien, the attached lien generally has priority if attached before security interest was perfected. Otherwise, the security interest has priority. - purchaser of collateral who buys for value and receives notice of any unperfected security interest (merely a bona fide purchaser)
- unperfected security interests (ranked in time of attachment)
- debtor
*General hierarchy
Buyer in ordinary course of business, HDC, and the like
PREVAIL OVER
PMSI Holders with Superpriority
PREVAIL OVER
- Perfected secured creditors (if between two, first to file or perfect wins)
- lien creditors (perfected secured creditor vs lien creditor: first to perfect (security interest) or attach (lien)
PREVAIL OVER
- unperfected secured creditor (if between two, first to attach wins)
PREVAIL OVER
unsecured general creditor
*After-acquired consumer goods.
Well, sometimes a guy will take out a loan, use one of his household consumer goods like his TV to secure it, but then he’ll be a wise-ass and sell the collateral off in order to destroy the secured party’s interest. A real douchenozzle, right?
Article 9 solves this problem by allowing for a clause in the security agreement that will cover later-acquired (after-acquired) interest in goods purchased with the proceeds of a good you already have a security interest in.
Here’s the catch, though – it’s only good for after-acquired collateral that has been purchased within 10 days of the creditor giving value for the security interest.
*After-acquired equipment versus a PMSI
situation where one creditor has a security interest in “equipment and after-acquired equipment,” and another creditor has a PMSI in new equipment they’ve just sold the debtor. This is what it looks like: A bank has a security interest in all washers and dryers at a hotel, and the hotel uses a PMSI from Sears to buy more washers and dryers. The PMSI holder (the most recent creditor in this situation) will have 20 days to perfect their PMSI after giving the collateral to the debtor; if they don’t perfect within those 20 days, then the earlier secured party with the after-acquired equipment clause will wi
*After-acquired inventory vs. PMSI
Just as you can have a clause giving you rights to equipment that a debtor may later purchase with proceeds from your secured collateral, so too can you have a clause giving you rights to inventory they may later purchase using proceeds from your collateral.
This rule is simple: Whoever sells the inventory to the debtor must perfect their interest in the new inventory before delivery.
Once the debtor receives delivery of the inventory, the perfected after-acquired inventory clause holder will win.
*Fixtures.
The battle is between the holder of a mortgage interest, and the holder of a secured interest in a fixture that the homeowner/building lessee has purchased to place in their home/restaurant/business/whatever.
Example: A bank has a mortgage interest in your restaurant, and you purchase a giant deep fryer for your restaurant with a PMSI from Sears. Sears has 20 days to perfect its interest in the fixture, or it will lose to the holder of the building mortgage.
*** to perfect fixtures, notice must be filed in the Real Property Records office of the county where the property is located
*Consignment interest.
sometimes, especially with the delivery of goods, the seller will “retain title” to the goods until full payment is received.
It’s not a PMSI, it’s more just a random thing merchants will sometimes shove into their delivery terms that minimizes their risk in the event of a shipping accident or breach by the buyer.
There are two ways you could conceivably tackle a fight between a perfected creditor and a consignor, and one of them is wrong.
The wrong way: “Oh, the buyer doesn’t have full title to the goods. This means that he doesn’t have authority to make an attached security agreement with a third party, right?” Wrong!
Here’s the right way: If the consignor wants to retain title against a third party lender, they must file a financing statement representing their consignment interest in the goods, and they must do it before the third party files or perfects.
This rule exists to protect third party creditors who take out a security interest in goods that they have no way of knowing are subject to a consignment clause.
*Conflicting PMSIs
if more than one party has a superpriority in collateral, the following rules apply:
(i) secured party who has a PSMI in collateral as a seller has priority over a secured party who has a PSMI in the same collateral as a lender.
(ii) otherwise, the first secured party to file or perfect prevails
