Priority

Question 1

How is the timing of perfection generally determined for priority purposes?

Answer 1

upon (i) attachment of the SI and (ii) compliance with a method of perfection;

if there is a change in the method of perfection without a lapse, then the perfection dates from the date on which the SI is first perfected

Question 2

What happens when there is a lapse in perfection?

Answer 2

The timing of perfection becomes the moment at which the lapse is cured (i.e.: the party loses their place in line)

Question 3

What is the general order of priority for interests in collateral?

Answer 3

Mechanic’s lien (for up to $1000) > PMSI > Perfected Interest > Judicial Lien > Unperfected Security Interest > General Unsecured Debt

Question 4

What happens if collateral is transferred?

Answer 4

• Transferee v. secured party with an SI—the SI generally continues in the collateral unless the secured party authorized the transfer free of the SI
• Buyer’s rights v. unperfected SI—the buyer takes the collateral free of the SI if the buyer (i) give value, and (ii) receives delivery, (iii) without knowledge of the SI
• Buyer’s rights v. perfected SI—the buyer generally takes the collateral subject to the SI

Question 5

What is a buyer in the ordinary course of business?

Answer 5

Buyer in the ordinary course of business (BOCB)—(i) buys goods (not farm products) by giving new value (cash, etc., not satisfaction of existing debt); (ii) in the ordinary course; (iii) from a seller in the business of selling goods of that kind; (iv) in good faith; and (v) without actual knowledge that the sale violates another’s rights in the goods

Question 6

What happens when a BOCB purchases goods covered by a security agreement?

Answer 6

BOCB takes free of any SI in goods given by buyer’s seller

Question 7

What is a consumer buyer?

Answer 7

Consumer buyer—(i) buys consumer goods for value; (ii) for his own personal, family, or household use; (iii) from a consumer seller; and (iv) without knowledge of the security interest

Question 8

What happens when a consumer buyer purchases goods covered by a security agreement?

Answer 8

a consumer buyer takes free of any SI in consumer goods unless a secured party has filed a financing statement covering the goods (“garage sale” rule)

Question 9

What is the general rule for determining priority?

Answer 9

• Perfected SI v. perfected SI—the first to file or perfect has priority; a lapse in filing or perfection restarts the clock
• Perfected SI v. unperfected SI—a perfected SI has priority over an unperfected SI
• Unperfected SI v. unperfected SI—the first to attach has priority (“first in time, first in right” rule)
• PMSI v. non-PMSI—generally, a PMSI has priority over a prior non-PMSI SI

Question 10

How is priority over proceeds determined?

Answer 10

General rule—“first to file or perfect” rule applies; the filing or perfection date for the original collateral is the filing or perfection date for the proceeds