Priority

Question 1

When does priority become an issue?

Answer 1

Where the secured party and some third party are claiming the same collateral

Question 2

What is the general rule for priority?

Answer 2

First to file or perfect, whichever occurs first, has priority

• operates as a “pure race statute”

Question 3

What is the rule if no party files or perfects?

Answer 3

First party to attach has priority

Question 4

What is the priority rule concerning purchase money security interests in goods other than inventory or livestock?

Answer 4

A PMSI in such goods has priority over a conflicting security interest in the same goods or its proceeds if:

• the PMSI is perfected at the time the debtor received possession of the collateral; or
• within 20 days thereafter

NOTE: always remember to state the general rule

NOTE: this is inapplicable to consumer goods, as well

Question 5

What is the priority rule concerning purchase money security interests in inventory or livestock?

Answer 5

PMSI in inventory or livestock has priority over a conflicting security interest in the same inventory or livestock if:

before the debtor receives possession** of the inventory or livestock, the **secured party

• perfects; and
• sends an authenticated notification to holders of previously filed conflicitng security interests in the collateral

1. inventory–must receive notice within 5 years before the debtor receives possession of the inventory
2. livestock–must receive notice within 6 months before the debtor receives possessino of the livestock

Question 6

What is the priority rule for a purchase money security interest in crops?

Answer 6

A secured party who gives new value** to **enable** a **debtor to grow crops

within 3 months before the crops are planted

has priority over perfected security interests covering obligations incurred more than 6 months before the crops were planted

Question 7

What happens when there are conflicting purchase money security interests?

Answer 7

A seller** secured party **PMSI** has **priority** over **lender** secured party **PMSI

Question 8

What are the priority rules for investment property?

Answer 8

A security interest perfected by control has priority** **over** a security interest perfected by **any other method

If conflicting control** security interests, rank according to **time of obtaining control

A security interest granted to a debtor’s intermediary has priority** over a security interest **granted by the debtor to another secured party

Notwithstanding the above, first to file or perfect governs priority otherwise

Question 9

What are the priority rules for deposit accounts?

Answer 9

A security interest perfected by control has priority over** a security interest perfected by **any other method (e.g., cash proceeds)

If conflicting interests were perfected by control,** **rank according to time of obtaining control

A secured party who has obtained control by putting the deposit account in its own name** has **priority** over **all other secured parties with control

A bank that has control because it maintains the deposit account** has **priority** over **all other secured parties

• EXCEPT a party who obtained control by putting in his name
• Also bank with which a deposit account is maintained may exercise any right of recoupment or setoff except for obtained control by putting in his name

NOTE: if a debtor transfers money or deposit account funds**, the **transferee** of the funds takes **free of a security interest** in the funds **unless the transferee acts in collusion with the debtor in violating the rights of the secured party

Question 10

What are the priority rules for a purchaser of chattel paper?

Answer 10

If a purchaser of chattel paper in good faith gives new value** and **takes possession** in the **ordinary course of business**, the purchaser will have **priority over:

• security interest that arises merely as proceeds of inventory; and
• any other security interest as long as the chattel paper purchaser acquired its interest without knowledge that its purchase violated the rights of the secured party

NOTE: any notation** on the chattel paper **of assignment is sufficient to give notice

Question 11

What are the priority rules for a purchaser of instruments?

Answer 11

Priority over a perfected security interest if

• the purchaser gives value; and
• takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party

Question 12

What are the priority rules for authorized sales of the collateral?

Answer 12

The buyer takes free of the security interest

• express authorization;
• implied authorization (e.g., inventory in the ordinary course of business)

NOTE: a written consent requirement may be waived via acquiescence

Question 13

What are the priority rules for unauthorized sale of the collateral to a buyer in the ordinary course of business?

Answer 13

General Rule–

**A buyer _in the _ordinary course of business**

• does the seller usually sell this stuff;
• does the seller usually sell this stuff in this manner

takes free of a security interest

created by his seller even though the security interest is perfected and even though the buyer knows of its existence

• exception: person buying farm products from a person engaged in farming ops
• exception: the buyer knows that sales is in violation of the terms of the security agreement

Question 14

What are the priority rules for unauthorized sales to buyers not in the ordinary course of business?

Answer 14

Buyers not in the ordinary course of business

• take subject** to **perfected security interests
• take free** from **unperfected** security interests (and unperfected agricultural liens) **unless they know of the sercurity interest

NOTE: a buyer not in the ordinary course of business can gain priority over a previously perfected secured party

• who makes a future advance on collateral after the buyer purchases the collateral IF:

1. the advance was made after the secured party learned of the purchase; or
2. more than 45 days after the purchase

Question 15

What is the priority rule for unauthorized sales to consumers in consumer sales?

Answer 15

In consumer goods**, a buyer takes **free** of a **security interest even though it is perfected if:

• he buys without knowledge of the security interest
• he buys for value; and
• he buys for his personal family or household purposes

UNLESS** the secured party **filed a financing statement covering such goods

NOTE: the goods must be consumer goods in the hands of both the buyer and the seller

• consumer-to-consumer sales

Question 16

What is the priority rule for a PMSI versus a buyer not in the ordinary course?

Answer 16

If the secured party files** with respect to a **purchase money security interest

within 20 days after the debtor receives possession of the collateral,

he takes priority** **over the

right of a buyer not in the ordinary course

which arises between** the time the security interest **attaches** and the time of **filing

Question 17

What is the general priority rule of a secured party versus a judicial lien creditor?

Answer 17

Perfected by filing = at the time the judgment was duly recorded

Then apply the general rule–first to file or perfect

NOTE: PMSI v. Lien Creditor

• if a secured party files with respect to a purchase money security interest within 20 days after the debtor receives possession** of the collateral, take **priority over the rights of a lien creditor which arises between the time the security interest attaches and time of filing

NOTE: a lien creditor will have priority** over a previously perfected secured party who makes a **future advance on collateral if

• the future advance was made more than 45 days after the lien arose,
• unless the advance was made without knowledge of the lien OR pursuant to a commitment made without knowledge of the lien

Question 18

What is the priority rule regarding a secured party and a statutory lien claimant?

Answer 18

Generally, the secured party takes priority over a statutory lien claimant