Priority Flashcards
What is priority?
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.
What is the general rule for a secured party v. secured party?
The first to file or perfect, whichever occurs first, has priority.
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?
Yes, they both attached and performed one of the five methods of perfection
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?
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
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?
B wins - This is a secured party v. secured party and B perfected first
What is the general rule for an unperfected secured creditor v unperfected secured creditor?
The first to attach has priority
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?
A wins, automatically perfected (PMSI and Consumer Goods)
What is one of the special rules in conjunction with a PMSI that allows you to jump other creditors in line?
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.
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?
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
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?
B does, under the special rule, PMSI and within 20 days
What is the general rule for a PMSI in inventory or livestock?
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).
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?
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
What is the general rule for conflicting purchase money security interests (PMSI’s)?
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
What is the Special priority rules for investment property? 4
- A security interest perfected by control has priority over a security interest perfected by any other method (filing or automatic)
- If conflicting security interests each were perfected by control, they rank according to the time of obtaining control
- 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)
- Except as provided in (1), (2), or (3) above, the first to file or perfect rule governs priority questions (default)
What are the special rules for deposit security accounts? 4 (These are hot on the bar right now, especially 3 & 4)
(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