Priority Flashcards
Basic context
: more than 1 party is staking claim on same collateral. Who gets to take first, second etc. ?
a. Basic concept: priority is purpose of collateralization, and the secured party seeks to subordinate, not to share
i. Not egalitarian
b. This is a piggish norm. Each claimant is entitled to satisfaction IN FULL before a subordinated claimant is entitled to take/ look to same collateral
Cast of characters
a. AUPie (attached unperfected creditor): This is the art 9 creditor who creates an enforceable security interest, i.e. it attaches, but either never bothers to perfect or tries to perfect but botches the effort, perhaps by filing in wrong place
b. LC (lien creditor): this is the general unsecured creditor who goes to court to get a judicial lien on the collateral
i. Never bothered to get collateral in the first place, but starts wanting to have collateral. Convinces judge to impose judicial lien on the collateral
c. PAC: Perfected attached creditor. Art 9 creditor who succeeds in attaining perfection
d. NOCie (Non-Ordinary Course Buyer): Someone who purchases the encumerd collateral outside the ordinary strea of commerce. For example, steven tyler buying a guitar from his car mechanic
i. At some risk.
e. BIOC (Buyer in ordinary course): Someone who purchases the collateral from a merchant’s inventory. For example buying guitar from guitar store
f. GUC(General unsecured creditor): Lender who never bothered to take collateral to back up lending risk.
Rank of priorities
i. BIOC—buyers in ordinary course always reign supreme
ii. PMSI holders with superpriority (only those when PMSI is in inventory or is perfected before or within 20 days after debtor receives possession)
iii. PAC—perfected attached creditors (including PMSIs that are not collateral or inventory) and LC—lien creditors. people who went to court
1. First to file/ attach of these wins
iv. NOCie – non ordinary course buyer. Buying outside stream of commerce puts you at risk
v. AUPie—attached and unperfected claimant
vi. GUC—general unsecured creditor
Specific contests: AUPie (attached unperfected claimant) vs. the world:
i. AUPie’s interest is enforceable as against the debtor, and AUPie will defeat any subsequent AUPies, as well as any GUC (general unsecured)
ii. He attached so enforceable agaist debtor
iii. Lose to perfected attached creditor, LC lien creditor, and any buyer without knowledge of security interest
Specific contests: PAC vs. the world
i. Basic rule: PAC defeats all, except
1. PAC who filed first,
2. Certain PMSI-holders
3. The BIOC
ii. PAC v. PAC—the first to perfect takes first, second takes second. First in time first in right
1. For purposes of determining priority, article 9 gives special effect to filing. Allows for early filing, even at the onset of loan negotiations. If an early filer subsequently attaches, she is allowed the benefit of her early filing. priority will relate back tot eh early filing date.
iii. PMSI- holder
1. Here, the relevant priority contest is between the after-acquired collateral financier (AACF) and the holder of a purchase-money security interest (PMSI).
3. Future advances – on the flipside, the collateral can serve as security not only for the present debt, but also for future extensions of debt the creditor provides
4. What is a PMSI?
a. A security interest that enables the debtor to purchase the goos. i.e. it is extension of value by lender who has security interest in the item that its loan enables the debtor to acquire
- How does AACF collide with PMSI-holder? One of two ways:
a. AACF vs. PMSI-holder when the collateral is not inventory
A PMSI in goods other than inventory and livestock has priority over conflicting interests if the interest is perfected before or within 20 days after debtor receives possession.
i. For example Macy’s gets loan by bank for equipment now held or hereafter acquired. Bank perfects. Bank is AACF PAC
ii. Later Office depot gives Macy’s 10 cash registers as PMSI. Collateral is equipment.
iii. Bank presumably has secured interest in the cash registers because it’s equipment hereafter acquired
iv. How does office depot get first priority in the 10 new registers they financed.
v. All Office depot must do is file properly within 20 days after Macy’s takes possession of the registers to break monopoly of after-acquired equipment the bank has.
b. AACF vs. PMSI holder when collateral is inventory
i. For example: macy’s gets 2 mil from bank with security interest on all inventory hereafter acquired. Bank perfects. Bank is AACF PAC.
ii. Later, Macy’s gets Armani spring line on credit, giving Armani security interest in the line. Armani is PMSI, but the spring line is INVENTORY.
iii. For Armani to get first priority, Armani must satisfy 2 requirements
1. Must file properly before debtor Macy’s takes possession
2. Armani must notify bank before Macy’s takes possession
iv. New safeguards because the collateral is now inventory and we need to prevent debtor fraud. Otherwise debtor may tell bank about new inventory to entice AACF PAC to extend more credit failing to mention that new inventory is already encumbered
v. So we impose onus on the new PMSI lender to inform the AACF
PAC v. BIOC
- General rule: PAC loses to BIOC. A buyer in the ordinary course of business takes free of a perfected security interest in seller’s inventory
- Even if Mrs. Jones buys suit that bank has perfected security interest in Nordstrom inventory, Mrs. Jones can rest assured she has good title
a. to promote commerce and honor buyer’s reasonable expectations
Roadmap up to priority
Is the collateralization in a THING
Has it attached? If so, go further
Did creditor perfect? If so,
Has debtor defaulted on debt?
Are there other contenders vying for place in line to get same collateral?
To determine who gets priority, apply various priority rules:
Then determine default rules. Determine whether default occurred
