Priority

Question 1

What is priority?

Answer 1

A situation where the secured party and some third party are claiming the same collateral. The third party may be another secured party, a purchaser of the collateral, or a creditor who has obtained a judgment against the debtor. There are rules that specify which party is entitled to first satisfy its claim out of the collateral.

Question 2

What is the general rule for a secured party v. secured party?

Answer 2

The first to file or perfect, whichever occurs first, has priority.

Question 3

Debtor needed money for his clothing business. He went to First Bank and Second Bank, asking each to loan him money and offering his inventory as collateral. They each made him sign a security agreement and a financing statement. First Bank filed first, on March 10, but did not loan Debtor any money (nor make any commitment to do so) until June 15. On April 20, Second Bank loaned Debtor the money and filed a financing statement. Debtor paid neither bank. Did both banks have a perfected security interest, assuming they both filed in the proper place?

Answer 3

Yes, they both attached and performed one of the five methods of perfection

Question 4

Debtor needed money for his clothing business. He went to First Bank and Second Bank, asking each to loan him money and offering his inventory as collateral. They each made him sign a security agreement and a financing statement. First Bank filed first, on March 10, but did not loan Debtor any money (nor make any commitment to do so) until June 15. On April 20, Second Bank loaned Debtor the money and filed a financing statement. Debtor paid neither bank. Which Bank has a superior right to the inventory?

Answer 4

First Bank wins, the fight rule is: First to file or perfect, so each creditor can choose; First Bank perfected on June 15, and First Bank filed on March 10 - Second Bank perfected on April 20, and Second Bank filed on April 20

Question 5

On February 1, A lends D $5000 and takes a security interest in D’s equipment. On March 1, B lends D $3000 and takes a security interest in the same equipment. B files a financing statement on March 5. A does not file a financing statement until March 20. Whose claim has priority?

Answer 5

B wins - This is a secured party v. secured party and B perfected first

Question 6

What is the general rule for an unperfected secured creditor v unperfected secured creditor?

Answer 6

The first to attach has priority

Question 7

On March 1, A loans D $2000 and takes a purchase money security interest in consumer goods. No financing statement is filed. On April 1, B obtains a non-purchase money security interest in the same consumer goods. B files a financing statement on April 2. D is unable to pay A or B. Who has priority?

Answer 7

A wins, automatically perfected (PMSI and Consumer Goods)

Question 8

What is one of the special rules in conjunction with a PMSI that allows you to jump other creditors in line?

Answer 8

Purchase money security interests in goods other than inventory or livestock (so equipment): A purchase money security interest in such goods has priority over a conflicting security interest in the same goods or its proceeds if the purchase money security interest is perfected at the time the debtor received possession of the collateral or within 20 days thereafter.

Question 9

On May 1, D buys equipment from A on credit, and A retains a security interest in the equipment. A delivers the equipment to D on May 5, but does not file a financing statement until May 12. In the interim, D borrows money from B, who obtains a security interest in the same equipment and files a financing statement on May 10. D defaults, and the value of the equipment is less than the amount owed to both A and B. Who has priority?

Answer 9

A wins under the special rule, I need to spot the PMSI in the hypo, PMSI in equipment, and perfects within 20 days, if you do not file within 20 days you blow it

Question 10

On October 1, A loans money to D and obtains a security interest in “all equipment now owned or hereafter acquired” by D. A filed a financing statement that same day. On November 5, B sold D some new equipment on credit, retaining a security interest in it. This new equipment was delivered to D on November 10. On November 20, B filed a financing statement. Which security interest has priority to this new equipment?

Answer 10

B does, under the special rule, PMSI and within 20 days

Question 11

What is the general rule for a PMSI in inventory or livestock?

Answer 11

A purchase money security interest in inventory or livestock has priority over a conflicting security interest in the same inventory or livestock (as well as proceeds that are chattel paper, instruments and identifiable cash proceeds) if, before the debtor receives possession of the inventory or livestock, the secured party (1) perfects, and (2) sends an authenticated notification to holders of previously filed conflicting security interests in the collateral. The holder of the conflicting security interest must receive this notice within five years before the debtor receives possession of the inventory (i.e., the notification is effective for deliveries of the same type of collateral for 5 years).

Question 12

On June 5, A obtains and perfects a security interest in all of D’s inventory “now owned or hereafter acquired.” On July 2, D buys inventory from B on credit and B retains a security interest in the inventory. On July 3, B files a financing statement and sends notification of the transaction to A. B delivers the inventory to D on July 6. D subsequently defaults on its obligations to A and B, and the value of the inventory is less than both these obligations. Who has priority?

Answer 12

B wins under the special rule
*If you are lending against inventory, there is a way to jump ahead of people (this is the one PMSI you dont have to know)
If B had never sent notification to A under the rule than A would have one, I must make sure that all of the elements are met

Question 13

What is the general rule for conflicting purchase money security interests (PMSI’s)?

Answer 13

The Code says that a seller purchase money security interest has priority over a financer purchase money security interest, otherwise the first to perfect wins

Question 14

What is the Special priority rules for investment property? 4

Answer 14

1. A security interest perfected by control has priority over a security interest perfected by any other method (filing or automatic)
2. If conflicting security interests each were perfected by control, they rank according to the time of obtaining control
3. A security interest granted to a debtor’s intermediary has priority over a security interest granted by the debtor to another secured party (unless the intermediary agrees otherwise)
4. Except as provided in (1), (2), or (3) above, the first to file or perfect rule governs priority questions (default)

Question 15

What are the special rules for deposit security accounts? 4 (These are hot on the bar right now, especially 3 & 4)

Answer 15

(1) A security interest perfected by control has priority over a security interest perfected via proceeds.
(2) If conflicting interests each were perfected by control, they rank according to the time of obtaining control.
(3) 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.
(4) A bank that has control because it maintains the deposit account has priority over all other secured parties with control except a secured party who has obtained control by putting the deposit account in his name.
* Note: As a general rule, a bank with which a deposit account is maintained may exercise any right of recoupment or set-off against a secured party that holds a security interest in the deposit account. If, however, the secured party has control of the deposit account by putting the account in its own name, then any set-off exercised by the bank based on a claim against the debtor is ineffective
* Note Also: If a debtor transfers money or deposit account funds (e.g., by writing a check or making an electronic funds transfer), 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 16

Secured Party v Buyer of Collateral general rule

Answer 16

If you buy something with a lien on it than you bring it home with the Lien still on it
2 EXCEPTIONS
1. Debtor authorizes the sold item to be free of the security
2. Unauthorized sales

Question 17

What is the definition of an authorized sale?

Answer 17

If the sale is authorized by the secured party, the buyer takes free of the security interest. This authorization may be express, or it may be implied from the type of sale or from the seller’s conduct.

Question 18

Bank extends credit to an appliance store and obtains a security interest in the store’s inventory. The security agreement gave no express authority to sell any of this inventory. The appliance store sells a washer and dryer to Harry Homebody. Is this sale authorized?

Answer 18

Yes - Implicit authorization for inventory sold to an ordinary consumer

Question 19

Bank extends credit to an appliance store and obtains a security interest in the store’s inventory. The security agreement gave no express authority to sell any of this inventory. The appliance store had sold its entire inventory to L, a liquidation sales company. Would this be authorized?

Answer 19

No - Not an ordinary consumer - L brought it home with a lien

Question 20

Bank extends credit to D, a hog farmer, and obtains a security interest in D’s hogs. The security agreement provides that D would not sell his hogs without written consent of the bank. Despite this provision, the bank acquiesced in over 100 sales of these hogs over a five-year period. Were these sales authorized?

Answer 20

Yes - Implicit authorization by acquiescence (they waived their right to object)

Question 21

What is the general rule for an unauthorized sale?

Answer 21

A buyer in the ordinary course of business (other than a person buying farm products from a person engaged in farming operations) 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.

Question 22

What is a buyer in the ordinary course of business?

Answer 22

A buyer in the ordinary course means a person who buys goods in good faith, without knowledge that the sale violates the rights of another person (usually the secured party) in the goods, and in the ordinary course from a person in the business of selling goods of that kind.

Question 23

Carla Consumer buys a new refrigerator from Appliance World, a retail store. Several months later, a representative of State Bank came to Carla’s home demanding that she turn over the refrigerator. The representative explains that State Bank has a perfected security interest in all of Appliance World’s inventory, and that because Appliance World has defaulted on its loan, the bank was repossessing. What should Carla tell the bank’s representative?

Answer 23

Legal Analysis: GR - when she brought it home had the lien, but the exception will probably apply here
yes, here is where the exception can apply run through the steps, debtors create the security interest, Carla would win under both exceptions *Pay in cash, then they cant find you

Question 24

The Bogarts purchased a sailboat with money borrowed from State Bank, which took a security interest in the sailboat and promptly perfected. Three months later, the Bogarts sold the sailboat to Mabel’s Marina, which sells new and used boats. A month later, the sailboat was sold to Nudnik. State Bank has tracked down the sailboat, and seeks to enforce its security interest in the sailboat which is in Nudnik’s hands. Can it enforce its security interest in the sailboat? [Note: The security interest was created by the Bogarts and not by Nudnik’s seller]

Answer 24

The Smart student says Nudnik is a buyer in the ordinary course, the debtor is the Boegarts, and so Nudnik does not have an exception
The question is what was it in the hands of the debtor

Question 25

What do Buyers not in the ordinary course of business take?

Answer 25

Take subject to perfected security interests. They take free from unperfected security interests (and unperfected agricultural liens) unless they know of the security interest

Question 26

Finance Company had a perfected security interest in Acme Manufacturing Company’s equipment. Without the knowledge of Finance Company, Acme sold a piece of its equipment to Baker Manufacturing Company. Acme defaulted on its loan to Finance Company, and Finance Company seeks to repossess all equipment. Can Finance Company recover the equipment that Acme sold to Baker?

Answer 26

Yes - Baker is not a buyer in the ordinary course, Baker takes subject to the perfected security interest of finance; HOWEVER if if Finance Company’s interest were unperfected at the time of the sale? - Than baker would take free of the unprotected security interest

Question 27

What is the special rule on consumer to consumer sales?

Answer 27

In the case of consumer goods, a buyer takes free of a security interest even though it is perfected if he buys 1. without knowledge of the security interest, 2. for value, and 3. for his own personal, family, or household purposes, unless prior to the purchase the secured party has filed a financing statement covering such goods.
Note: The goods must be consumer goods in the hands of both the buyer and the seller.

Question 28

Consumer buys a new television set on credit from S. S retains a security interest but does not file a financing statement. Consumer holds a garage sale and sells the television to Irma (who will use the television in her home). Does Irma take free of S’s security interest?

Answer 28

Yes under the special rule of consumer to consumer sales, if Irma knew of the security interest than she would not take free, the buyer must not know, also if S had perfected before Irma bought the TV than Irma would not have taken free; (I need to know the analysis

Question 29

Secured party v judgment lien holders general rule:

Answer 29

An unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected. If the security interest is perfected before the person becomes a lien creditor, the security interest has priority.
KEY: Look at the time of perfection of the security interest and the time of the levy by the sheriff.
If the security interest is perfected before the sheriff levies, the security interest has priority.
If levy precedes perfection of the security interest, the judicial lien has priority.
*NOTE: Technically, the priority rule for secured party v. judgment lien holder is that the secured party has priority (1) if the secured party perfected before the judgment lien holder got its lien; OR (2) if the secured party obtained a security agreement and filed a financing statement before the judgment lien holder got its lien.

Question 30

What is a judgment lien holder under Article 9?

Answer 30

Article 9 defines a “lien creditor” as “a creditor who has acquired a lien on the property involved by attachment, levy or the like.” While Article 9 does not clearly define the moment when the status of “lien creditor” arises, the lien obtained by judicial proceedings must attach to the collateral. An unsecured creditor who has obtained a judgment and has levied on that judgment is a “lien creditor.”

Question 31

On April 5, S loans $5000 to D and obtains a non-purchase money security interest in D=s equipment. On April 10, L tries to collect her $20,000 judgment against D by having the sheriff levy on D’s equipment. S perfects its security interest by filing on April 13. The equipment is worth only $20,000. Who has priority?

Answer 31

L, levy before perfection
-What if S’s security interest had been perfected by filing on April 8?
A: Than S wins, perfection before levy

Question 32

Special Rule: PMSI v Lien Judgment Holder:

Answer 32

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 rights of a lien creditor which arises between the time the security interest attaches and the time of filing

Question 33

What is the general rule for Priority for Future Advances?

Answer 33

A security agreement can secure present and future advances. A future advance by a secured creditor has priority over a lien creditor if the future advance is made (1) without knowledge of the lien, OR (2) within 45 days of the lien arising, OR (3) pursuant to a commitment entered into without knowledge of the lien

Question 34

Secured party v. statutory lien claimants (mechanical lien holders) general rule

Answer 34

Statutory lien wins - Beats even a perfected security interest (they have a “privileged” status)

Question 35

Bank has a perfected security interest in a car owned by D. D takes the car to Bubba’s garage for repairs. Bubba makes the repairs, but D fails to pay Bubba. By statute (and common law) Bubba has a lien on the car. D also defaults on his loan to Bank. Who has priority to the car?

Answer 35

Statutory lien wins - Beats even a perfected security interest (they have a “privileged” status)