Priority

Question 1

Define unsecured creditors

Answer 1

Creditors without a security interest in the debtor’s collateral

Question 2

True or false: Unsecured debtors have no rights against the property

Answer 2

True.

BUT they likely have contract rights against the debtor

Question 3

How can an unsecured creditor obtain rights in property?

Answer 3

1. Security interest by agreement
2. Lien on the collateral

Question 4

True or false: Liens are judicial only

Answer 4

False. Liens can be judicial or statutory

Question 5

What is the priority rule for perfected security interest v. perfected security interest?

Answer 5

First in time to file OR perfect takes priority

*rewards an early filer even if subsequent filing party is first to attach or to perfect

Question 6

What is the priority rule for perfected security interest v. unperfected security interest?

Answer 6

Perfected security interest > unperfected security interest

Question 7

What is the priority rule for unperfected security interest v. unperfected security interest?

Answer 7

First to attach or become effective

Question 8

What is the rule for perfected security interest v. Lien creditor?

Answer 8

Perfected Security Interest > Lien creditor

Question 9

What is the rule for unperfected security interest v. Lien creditor?

Answer 9

Lien creditor > unperfected security interest

EXCEPT

Debtor w/authenticated security agreement (collateral) + financing statement on file - value > lien creditor

Question 10

What is the rule for security interest v. statutory lien?

Answer 10

Statutory lien = created by statute > security interest IF

+ effectiveness of the lien depends on lienholder’s possession
+ lien secures payment or performance in the ordinary course of person’s business
+ Statute doesn’t provide otherwise

Question 11

What is the rule for secured party v. secured party over future advances?

Answer 11

First party to file or perfect with respect to future advances

*even if the secured party has knowledge of the competing security interest when future advance was made

Question 12

What is the rule for secured party v. lien creditor over future advances?

Answer 12

Advances made more than 45 days after person becomes a lien creditor are subordinate to the lien creditor unless

+ advance is made without knowledge of the lien OR
+ advance is made pursuant to a commitment entered into without knowledge of the lien

Question 13

What is the rule for Buyer v. Perfected Security interest?

Answer 13

Unless the secured party authorizes the sale free and clear of its security interest, buyer takes “subject to” a perfected security interest

Question 14

What is the BIOCB exception to the “subject to” rule for buyer v. perfected security interest?

Answer 14

BIOCB = free of security interest IF
+ Buyer buys goods form a merchant
+ In the ordinary course of the merchant’s business
+ Buyer acts in good faith, without knowledge that the sale violates the rights of others in the same goods (narrow)
+ Seller is engaged in selling goods of the kind
+ Seller is not a pawn broker

If any of these elements are not present, subject to rule applies

Question 15

What is the garage sale exception to the “subject to” rule for buyer v. perfected security interest?

Answer 15

Consumer = Consumer free of security interest IF
+ Buyer buys consumer goods for value
+ For the buyer’s personal/household/family use
+ From a consumer seller
+ Without knowledge of security interest

UNLESS the secured party has filed a financing statement

If any of these elements are not present, subject to rule applies

Question 16

What is the general priority rule for Buyer v. Unperfected security interest?

Answer 16

Unless a secured party authorizes the sale free and clear of the security interest, the buyer takes subject to a security interest

Question 17

What is the one exception to the “subject to” rule for buyers and unperfected security interest holders?

Answer 17

Buyer will take free of an unperfected security interest if the buyer

1. Gives value
2. Receives delivery of collateral
3. Without knowledge of the preexisting interest

Question 18

True or false: All PMSIs are automatically perfected so long as the collateral is not subject to certificate of title law

Answer 18

False. Automatic perfection only applies to consumer goods.

All other non-consumer good PMSIs require the secured party to file a financing statement or take possession of collateral to perfect

Question 19

If a PMSI perfects within 20 days of the debtor receiving collateral, will the PMSI take priority over a lien that arose during that 20 day period?

Answer 19

Yes.

Same rule for lien creditors v. security interest + 20 day grace period from when debtor receives the collateral, to perfect

Question 20

True or false: PMSIs in goods (besides inventory and livestock) take priority over all other security interests, no matter when perfected

Answer 20

True, as long as the secured party perfects within 20 days of the debtor receiving the goods

Question 21

What happens if a PMSI in goods (not inventory, not livestock) fails to perfect within 20 days and a security interest have a priority conflict?

Answer 21

First in time to file or perfect applies

Question 22

True or false: PMSI for consumer goods will always meet the 20-day rule

Answer 22

True. PMSI in consumer goods are automatically perfected.

Question 23

What is the super priority rule for PMSIs in inventory or livestock?

Answer 23

Priority over all other security interest in that same inventory IF

1. Perfects before inventory is delivered to the debtor
2. Sends authenticated notification of the PMSI to other secured parties

Question 24

What is the rule for PMSI v. PMSI in a priority dispute?

Answer 24

Seller > Lender

Otherwise, apply first to filer or perfect rule