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Secured Transactions > Priority > Flashcards

Priority Flashcards

1
Q

BASIC RULES

2 types of rules

A
  1. two or more creditors try to collect their debts from the same property, or
  2. when creditors try to collect debts from property that their debtor has sold to a third party.
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2
Q

SECURED PARTY V. SECURED PARTY // BASIC RULES

3 basic rules

A
  1. First-to-File-or-Perfect (Two Perfected Security Interests)
  2. Perfected Secured Interests Have Priority over Unperfected Secured Interests
  3. First to Attach (Between Two Unperfected Security Interests)
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3
Q

SECURED PARTY V. SECURED PARTY // BASIC RULES

Rule + application of First-to-File-or-Perfect

A

= security interests rank according to priority of time of filing or perfection AKA the first secured creditor to do either one of those things

  • most important rule and most commonly applicable one
  • applies when the priority dispute is between two or more perfected Article 9 security interests
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4
Q

SECURED PARTY V. SECURED PARTY // BASIC RULES

2 takeaways from First-to-File-or-Perfect

A
  1. UCC actually allows a secured party to file before it has attached
  2. not actually enough to be the first to file or perfect–have to be the first to file or perfect, be perfected, and STAY CONTINUOUSLY PERFECTED
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5
Q

SECURED PARTY V. SECURED PARTY // BASIC RULES

Perfected Secured Interests Have Priority over Unperfected Secured Interests

A

Between two security interests, if one is perfected and one is not, then the perfected security interest has priority over the unperfected security interest
AKA perfection beats nonperfection
(NOTE: this is not really a “first-in-time” rule b/c only one security interest is currently perfected—that security interest is not necessarily the “first” one to initially be perfected, it’s the only one to perfect (or at least to currently be perfected))

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6
Q

SECURED PARTY V. SECURED PARTY // BASIC RULES

First to Attach (Between Two Unperfected Security Interests)

A

= the first security interest to attach or become effective has priority if conflicting security interests are unperfected
AKA first to attach has priority
(applies when sometimes, although not often, there may be a priority dispute between two secured parties, and neither one of their security interests are perfected; this may be because both security interests have lapsed in perfection, or possibly because neither of them was ever perfected in the first place (or possibly some combination of the two))

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7
Q

SECURED PARTY V. LIEN CREDITOR // BASIC RULES

Lien creditor

A

= a creditor that originally obtained a money judgment in court, on either a debt or contract or tort.

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8
Q

SECURED PARTY V. LIEN CREDITOR // BASIC RULES

Priority rule

A

a secured party defeats a lien creditor in priority by
1. Perfecting before judicial lien arises by sheriff’s levy OR
2. Having debtor sign a proper security agreement granting a security interest in the property at issue AND filing a financing statement describing that property (this could technically be before the secured party is perfect since the loan may not have been made yet–no value)
(first-in-time, first-in-right rule)

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9
Q

SECURED PARTY V. SECURED PARTY

the rules to know

A
  1. 3 general priority rules
  2. 2 PMSI rules
  3. Consignor rule
  4. Conflicting PMSI rule
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10
Q

SECURED PARTY V. SECURED PARTY

rule of priority btwn 2 perfected secured creditors

A 
= first to 
1. file OR
2. perfect
wins
(whichever date is earlier)
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11
Q

SECURED PARTY V. SECURED PARTY

rule of priority btwn 2 unperfected secured creditors

A

= first to attach wins

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12
Q

SECURED PARTY V. SECURED PARTY

rule of priority btwn unperfected and perfected secured creditors

A

= perfected wins

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13
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
2 key situations

A
  1. PMSI in goods other than inventory or livestock

2. PMSI in inventory

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14
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in goods other than inventory or livestock rule (+ effect of superpriority)

A

= PMSI in such goods has priority over a conflicting interest in the same goods OR its proceeds
ONLY IF the PMSI is perfected within 20 days of the debtor receives possession of the collateral
(most common = normally covers PMSI in equipment)

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15
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in inventory superpriority scope

A

PMSI in inventory has priority over a conflicting security interest in

  1. the same inventory
  2. Proceeds of that inventory that are chattel paper
  3. Proceeds of that inventory that are instruments
  4. Any identifiable cash proceeds
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16
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in inventory rule

A

PMSI in inventory has priority over conflicting security interest
ONLY IF
1. PMSI in inventory is perfected AT THE TIME the debtor gets possession of the inventory
(filing must take place before inventory delivered to debtor)
AND
2. the notification requirement is satisfied

17
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in inventory notification requirement

A

Any secured party

  • who has FILED her security interest in the same inventory
    1. must RECEIVE
  • an AUTHENTICATED NOTIFICATION of the PMSI
  • that states that the PMSI lender has or expects to take a PMSI in inventory of the debtor (described by kind or type)
    2. BEFORE debtor receives possession of the inventory
18
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in inventory notification effect

A

notification is effective

  • for deliveries of the same type of collateral
  • for 5 years
19
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
Consignors rule

A

= interest in the consigned goods is treated just like PMSI in inventory
AKA consignors get superpriority of PMSI in inventory (as long as they meet the requirements)

20
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
Conflicting PMSI rule

A

conflict btwn seller-financed PMSI and financer-financed PMSI
= seller-financed PMSI wins
(pretty rare situation)

21
Q

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
operation of special rules (if you fail to satisfy the triggers of special rules, do you lose?)

A

Not necessarily, you just revert back to default rules

22
Q

NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Secured creditor v. buyer of collateral

A

General rule = buy with security interest on it, bring it home with security interest on it

23
Q

NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Exceptions

A
  1. Authorized sale exception
  2. Unauthorized sales to the buyer in the ordinary course of business
  3. Consumer to consumer sale of consumer goods (garage sale rule)
24
Q

EXCEPTIONS // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Authorized sale

A

If the sale is authorized by secured creditor free of security interest, then buyer takes free of security interest

25
Q

AUTHORIZED SALE EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT
Express authorization

A

look at the security agreement, must be explicitly stated therein

26
Q

AUTHORIZED SALE EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT
Examples of implied authorization

A
  1. Sale of inventory to an ordinary consumer is impliedly authorized by secured party
  2. Acquiescence
27
Q

AUTHORIZED SALE EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT
Implied authorization by acquiescence

A
  1. Knew about the sale and
  2. Didn’t stop it
    (pretty much estoppel or maybe waiver)
28
Q

EXCEPTIONS // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Unauthorized sales to the buyer in the ordinary course of business

A

= buyer in the ordinary course of business takes free of a security interest created by his seller EVEN THOUGH he knows it’s perfected and knows of its interest
(but can’t know that sale violates a specific creditor’s rights)

29
Q

UNAUTHORIZED SALES EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT
Buyer in the ordinary course of business

A

= buyer who buys goods

  1. From a person in the business of selling goods of that kind
  2. in good faith
  3. Without knowledge that the sale violates the rights of secured party
30
Q

UNAUTHORIZED SALES EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT
Buyer not in the ordinary course of business rule

A
  • If you don’t know there’s a security interest = you take subject only to perfected security interest (but not to unperfected security interest)
  • If you know there’s a security interest = you take subject to perfected or unperfected security interest
31
Q

EXCEPTIONS // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Garage sale rule

A

AKA Consumer to consumer sale of consumer goods rule
1. if he buys without knowledge of security interest
2. consumer goods (in both the hands of seller and buyer)
3. for value
4. for personal, family, or household purposes
UNLESS the secured party files a financing statement BEFORE the C2C purchase

32
Q

EXCEPTIONS // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Only rule where it doesn’t matter whether you know that there’s a security interest on purchase

A

= buyer in the ordinary course of business rule

33
Q

more more more too much more
PMSI SUPERPRIORITY // SPECIAL RULES
Rationale

A
  • Capitalism = want debtors to buy things and like creditors to enable them to buy things
  • also doesn’t really harm the non-PMSI secured creditors b/c without the PMSI creditor, their interest in collateral couldn’t exist
34
Q

more more more too much more
PMSI SUPERPRIORITY // SPECIAL RULES
Definition of superpriority

A

= PMSI secured parties will enjoy priority in the collateral, even if they’re not first
AKA “second-in-time, but first in right”

35
Q

more more more too much more
PMSI SUPERPRIORITY // SPECIAL RULES
rules for 4 types of situations

A
  1. general rule for a PMSI secured party vs. a non-PMSI secured party
  2. rule for a PMSI in inventory vs. a non-PMSI security interest in inventory
  3. PMSI secured party vs. another PMSI secured party.
  4. PMSI secured party vs. a lien creditor
36
Q

more more more too much more
PMSI V. NON-PMSI // SPECIAL RULES
General rule

A

a perfected purchase-money security interest

  • in goods other than inventory
  • has priority over a conflicting security interest in the same goods
  • IF the purchase-money security interest is perfected
    1. when the debtor receives possession of the collateral OR
    2. within 20 days thereafter
37
Q

more more more too much more
PMSI V. NON-PMSI // SPECIAL RULES
3 takeaways of general rule

A
  1. Only applies to PMSIs
  2. applies to non-inventory goods (there’s a special rules that applies if PMSI goods are inventory)
    - as a practical matter, we are talking about either equipment or consumer goods (but mostly equipment)
    - AKA stuff that a business uses in running its business, as opposed to stuff that it’s in the business of selling
    - (e.g., Best Buy’s Wesco forklift in the back warehouse, not its TVs and computers)
  3. PMSI secured party has a deadline to perfect, which is no later than 20 days after the debtor obtains possession of the goods
    = if they have a PMSI in non-inventory goods, and they perfect within 20 days after debtor gets possession of the goods, they win the priority dispute, even though their security interest came later
38
Q

more more more too much more
PMSI V. NON-PMSI // SPECIAL RULES
general rule example (just read it okay)
- Say that on February 1, Wayne’s Widget Warehouse (in the business of selling widgets) borrowed $100,000 from First Bank for general operating expenses.
- In order to secure the loan, Wayne signed a security agreement granting First Bank a security interest in all his equipment, now owned or thereafter acquired. First Bank filed a proper financing statement on February 2.
- On March 1, Wayne purchased a new Acme XL400 Widget-Making-Machine from Paula’s World-of-Appliances, for a price of $50,000. Wayne planned to use the Acme XL400 to manufacture widgets for sale.
- Paula directly financed the purchase with Wayne. Wayne paid $10,000 down, and agreed to pay the remaining $40,000 over 3 years with interest. Wayne also signed a security agreement granting Paula a security interest in the Acme XL400 Widget-Making-Machine.
- The Acme XL400 was delivered to Wayne’s place of business on March 5. Paula filed a proper financing statement on March 15.

A
  • In this case, although both First Bank and Paula would have perfected security interests in the Acme XL400, Paula’s security interest would have priority.
  • This is because it was a PMSI (she extended credit to enable Wayne to purchase the machine), and Paula properly filed within 20 days of Wayne’s receipt of possession of the machine on March 5. If Paula had not filed until, say, April 1, she would not obtain PMSI superpriority—although her security would still be perfected, it would not have PMSI superpriority because she did not file within 20 days of possession (March 5) as required by 9–324(a). She needed to file by March 25 or before to make this happen.

Secured Transactions (7 decks)

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