Priority Flashcards
Priority Rules
- Perfected security interests have priority over unperfected security interests.
- Between two perfected security interests, the first to have been filed (FS filed) or perfected has priority.
Meaning filing date or perfection date, which ever is earlier wins.
*So this means that if you filed first, even if you didn’t actually perfect yet (like bc you hadn’t given value yet), your filling is given priority as of that date you filed not necessarily when it actually perfected.
- PMSIs have priority over non-PMSIs. (also recall PMSI in consumer goods is automatic perfection).
- Perfected security interests have priority over creditors in bankruptcy.
- A buyer in the ordinary course of business usually takes goods from debtor free of any security interests.
- If no party perfects, then the first to attach has priority.
Note: it’s the date of filing or perfection that determines priority—not the date of attachment. Except for two unperfected SIs conflicting, then first to attach.
Note: Priority is NOT affected by the knowledge that one creditor may have of the other’s interest.
Priority in a nutshell
For investment property and nonconsumer deposit accounts, the party with control generally has priority.
Then, generally according to this hierarchy:
• Buyer in the ordinary course of business, if the security interest is created by the buyer’s seller
• Holder in due course and the like of a negotiable instrument
• Transferee of money or funds from deposit accounts
• 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—such as a neighbor buying from a neighbor—has priority over an auto- matically 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)
• As between perfected security interests in the same collateral, the first to file or perfect has priority
• As between a perfected security interest and an attached lien, the attached lien generally has priority if the lien was attached before the security interest was perfected. Otherwise, the security interest has priority. So first to perfect (SI) or attach (lien) wins.
• Purchaser of collateral who buys for value and receives delivery without notice of any unperfected security interest
• Unperfected security interests (rank in priority according to order of attachment)
• Debtor
Between two perfected security interests…
- Between two perfected security interests, the first to have been filed (FS filed) or perfected has priority.
Meaning filing date or perfection date, which ever is earlier wins.
*So this means that if you filed first, even if you didn’t actually perfect yet (like bc you hadn’t given value yet), your filling is given priority as of that date you filed not necessarily when it actually perfected.
Between two unperfected SIs…
When two unperfected security interests conflict, the first to attach has priority.
PMSI
A PMSI arises when the goods for which the loan is extended to the debtor is the collateral for the security interest.
Generally, a PMSI takes priority over a conflicting, perfected security interest in the same goods.
A PMSI can arise in two ways:
• The secured party sells the goods to the debtor on credit and retains a security interest in the goods sold,
or if:
The creditor loans the funds to the debtor to enable the debtor to buy specific collateral, and
those funds are used by the debtor to acquire the specific collateral, and
the creditor takes a security interest in that collateral.
The PMSI secures whatever portion of the purchase price still has to be paid.
PMSI perfection and priority
SUPERPRIORITY
PMSIs enjoy a superpriority—they’re superior to prior perfected security interests in the same collateral if certain conditions are met: PMSI rules depends on class of collateral.
- consumer goods:
A PMSI in consumer goods is automatically perfected. - Inventory or livestock;
A PMSI in inventory must be perfected (usually by filing) BEFORE/(by the time) the debtor gets possession of the collateral—there is no 20-day grace period—and others with a previously filed security interest in the inventory must be given notice. - Other goods.
A PMSI in equipment can be perfected (usually by filing) any time within 20 days after the debtor gets possession of the collateral,
If PMSI in Inventory or Livestock:
If PMSI in Inventory or Livestock:
PMSI has priority over a conflicting security interest in the same inventory or proceeds of the inventory that are chattel paper, instruments, or cash if:
Before debtor receives possession of the inventory,
SP Perfects and
SP sends notification to other SPs with SIs in the same inventory, (notification good for 5 years)
(Ex - Situation where this applies:
SP1 has perfected SI in all of D’s after-acquired inventory.
Then, D buys inventory from SP2 on credit and SP2 retains SI in the inventory (so PMSI created).
Before D takes possession (before SP2 delivers the inventory), SP2 files a FS (perfects) and sends notification to SP1. SP2 then delivers the inventory to D.)
SP2 wins over SP1.
AKA: If:
[It is perfected at the time the debtor gets possession of the inventory (filing must take place before the inventory is delivered to the debtor),] and
Any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory, and:
the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type.
The notification is effective for deliveries of the same type of collateral for 5 years.
PMSI in other goods (not inventory or livestock)
If PMSI in other goods (ex- equipment):
PMSI has priority over conflicting security interests in the same goods or their proceeds IF the interest is perfected before or within 20 days after the debtor receives possession of the goods.
[Then, PMSI has priority as of that date debtor got possession (so will be prioritized over anyone after).]
(ex: Seller sells Corp equipment on credit and retains SI (so PMSI), now seller has priority in that equipment or their proceeds if they perfect within 20 days after the Corp gets possession of the equipment.)
Consignor interest in consigned goods
A consignor’s interest in the consigned goods is considered to be a PMSI in inventory.
Therefore, a consignor can acquire PMSI superpriority in consigned goods if the consignor complies with the requirements for gaining PMSI superpriority in inventory.
For conflicting PMSIs
• A SP who has a PMSI in collateral as a seller (a seller-financed PMSI) has priority over a secured party who has a PMSI in the same collateral as a lender (a financer-financed PMSI)
• Otherwise, the first secured party to file or perfect prevails.
Future Advance Clause
Permissible. Secures future advances in the present security agreement, meaning the C will also serve as Security for a future advancement. If SA has it, a new security agreement is not needed when a future advance is made.
“Creditor takes SI… to secure this loan and any future indebtedness of Debtor to Creditor”
Priority for conflicting SI’s in INVESTMENT PROPERTY
INVESTMENT PROPERTY:
A security interest perfected by CONTROL has priority over a security interest perfected by any other method (filing or automatic perfection).
For conflicting security interests perfected by control, they rank according to the time of obtaining control (unless one of the secured parties with control is a securities intermediary, in which case the securities intermediary will prevail).
In all other cases, the “first to file or perfect” rule governs priority questions for investment property.
So….
Control by Securities intermediary,
Then, First to obtain Control,
Then, first to file or perfect.
Priority for Conflicting Security Interests in DEPOSIT ACCOUNTS
Recall: Deposit accounts have to be perfected by Control.
SI in a deposit account that is perfected BY CONTROL has priority over SI that’s perfected by any other method (proceeds of other Collateral).
If conflicting SIs that are perfected by control, governed in this order:
1. A SP who has obtained control by putting the deposit account in the party’s 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 secured parties with control except for (1^).
- Lastly, Rank according to time of obtaining control.
Note: If a debtor transfers money or deposit account funds (for example, by writing a check or making an electronic funds transfer) to a person, that person takes free of any security interest in the money or funds, unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
Purchasers of Chattel paper and Insutrments
If a purchaser (or party who takes SI) of chattel paper in good faith gives new value and takes possession of the chattel paper in the ordinary course of business (or takes control of electronic chattel paper), the purchaser has priority over:
• A security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper doesn’t indicate that it has been assigned to anyone other than the purchaser, and
• Any other security interest in the chattel paper, as long as the chattel paper purchaser acquired their interest without knowl- edge that its purchase violated the rights of the secured party.
