Priority

Question 1

priority rule as between two perfected secured creditors

Answer 1

• governing rule is first in time: first to file OR perfect gets priority over other creditors

o **note: you don’t need to attach in order to file, but you need to attach in order to ultimately be perfected – so you can file first and then attach, but YOU NEED TO EVENTUALLY ATTACH to be a perfected creditor
»> just make sure you attach before default so you are considered perfected!

o **its not actually enough to be the first to file/perfect – you must be (1) first to file/perfect, (2) be perfected, and (3) stay continuously perfected (i.e. no gaps in coverage)

Question 2

priority rule between secured party vs judgment lien creditor

PMSI caveat

statutory liens rule

Answer 2

 rule for judgment lienholders: SP will have priority if it does one of these two before LC GETS THE LEVY:

• perfects (**most common), OR
• files a SA and FS (i.e. don’t need value given or D rights in CL)

 caveat for PMSI SPs: if a person files a FS with respect to a PMSI before or within 20 days after D receives delivery of the CL, the SI takes priority over the rights of a lien creditor which arise between the time the security interest attaches and the time of filing (I.E. YOU GET RELATION BACK)

> > > so if you have a PMSI in goods, but before you perfect, a lien creditor levies the goods, you can still win, even if you perfect after that levy, so long as you perfect within the 20 day grace period

 statutory liens: statutory lienholders will beat EVEN a perfected SI ONLY IF they remain in possession of the CL

Question 3

key considerations for PMSI priority

Answer 3

o **because we want to encourage this kind of lending, PMSI SPs will often get “super priority” (that is, they can be second in time, but first in right)

o **issues relating to PMSI priorities often depend on the classification of the collateral as equipment or inventory

Question 4

rule for PMSI in goods other than inventory

Answer 4

 PMSI in equipment (or consumer goods): you go to top of line SO LONG AS you perfect by time D receives goods or within 20 days

Question 5

rule for PMSI in inventory

Answer 5

 its harder to get super priority in a PMSI in inventory

 in order to gain priority, over:
»> conflicting SI in the same CL
»> conflicting SI in chattel paper/instruments constituting proceeds of the inventory, and
»> proceeds of the chattel paper,

• the PMSI SP in inventory must by or before the time when the debtor receives possession of the inventory (i.e. no 20 day grace period):
o be perfected, AND
o send an authenticated NOTIFICATION to any other conflicting SI in that inventory

 must provide that the SP has or expects to acquire a PMSI in inventory, with a sufficient description of that inventory

 conflicting SP must receive this notification within 5 years before debtor receives possession of the inventory
»> ex – a notice that SP indents to do a PM transaction in Model A widgets would be good for five years of subsequent Model A widget PMSI transactions

Question 6

priority rules for PMSI SP vs PMSI SP

Answer 6

 if all the steps of 9-324(a) were taken (if the CL is equipment), or if all the steps of 9-324(b) were taken (if the CL is inventory), and there are two such PMSIs in the same collateral, the DIRECT FINANCING SELLER PREVAILS over a 3p lender

 if both SPs are direct financing, or both are 3p lenders, the first in time, first in right rule prevails

Question 7

buyers of goods vs SPs - rule & 2 key exceptions

Answer 7

o default rule: buyers DO NOT TAKE FREE AND CLEAR of a SI in the items sold – the SI continues in the CL notwithstanding sale or other type of disposition
»> **attaches to proceeds as well, so the SP can collect the CL or its proceeds
»> but SP will typically go after the proceeds from the debtor

 exceptions:

(1) SP explicitly or implicitly (knowingly does nothing) CONSENTS to the sale – in that case, it cannot claim rights in the CL but can claim rights in the proceeds, or
»> **common example is when the CL is INVENTORY in the hands of the ORIGINAL DEBTOR - if you have a SI in inventory and you don’t expressly say your SI continues with the new buyer, you will have been held to have impliedly consented to the sale, and the buyer will take FREE OF your interest
»> excludes a buyer that purchases substantially all of the assets of an entire business

(2) you are a BIOC: one who buys goods, in good faith, without knowledge of violating SP’s rights, from a person who is engaged in selling goods of that kind (i.e. a merchant)
»> SI’s created by the OG SELLER ONLY (the OG debtor) do not follow with CL EVEN IF buyer knows about it and even if it is perfected
»> so buyer CAN have knowledge of a SI on the property you are buying, BUT buyer CANNOT have knowledge that the sale violates the SP’s rights

 EXCLUDES goods subject to certificate of title

Question 8

buyers NOT in the ordinary course vs SPs

Answer 8

• these buyers take subject to PERFECTED SIs

• these buyers can take free of UNPERFECTED SI’s, unless they know of the existence of the SI when they give value/take delivery
»> a BFP analysis

 if a person files a FS with respect to a PMSI before or within 20 days after D receives delivery of the CL, the SI takes priority over the rights of a buyer which arise between the time the security interest attaches and the time of filing
• same as lien creditor rule!

Question 9

exception for consumer to consumer sales

Answer 9

• garage sale rule: if goods are consumer goods in BOTH hands of buyer and seller, and the BUYER is without knowledge of SI AND pays value, he takes free of the SI SO LONG AS SP has not filed a FS

Question 10

knowledge issue for priorities

Answer 10

knowledge is IRRELEVANT in determining priorities (unless you are a buyer)

Question 11

priority rule for unperfected SP vs unperfected SP

Answer 11

first to ATTACH

Question 12

priority rule for UNperfected SP vs perfected SP

Answer 12

perfected wins